Unaddressed Industrial Organisation and Antitrust Risks in KESONIA

Domain:

socioeconomic

Record type:

paper

Creator:

Leo

Publisher:

Host:

Kenya’s adoption of the Kenya Shilling Overnight Interbank Average (KESONIA) as the anchor for its revised Risk-Based Credit Pricing Model represents a significant modernization of monetary and financial infrastructure. By replacing opaque reference rates with a transaction-based benchmark closely aligned to the policy rate, the reform promises improved transparency, stronger monetary transmission, and closer alignment with international best practice. These gains, however, come with under-examined risks rooted not in macroeconomics but in industrial organization and competition economics. This paper argues that anchoring all variable-rate lending to a single, publicly observable benchmark in a highly concentrated banking system fundamentally alters the strategic environment of credit markets. KESONIA functions as a focal point that lowers monitoring costs among dominant banks, expands the set of sustainable coordinated pricing equilibria, and reduces effective price rivalry even in the absence of explicit collusion. Mandatory, high-frequency disclosure of bank-level lending premiums and fees—while intended to enhance consumer transparency—further generates information-sharing externalities that can stabilize supra-competitive spreads. These risks are amplified by the structure of Kenya’s interbank market, where a small group of large banks dominate both upstream liquidity provision and downstream retail lending, creating scope for vertical and horizontal foreclosure through margin squeezes or discriminatory access to funding and clearing infrastructure. Drawing on stylized facts from Kenya’s banking sector and standard oligopoly models, the paper situates KESONIA within Kenya’s constitutional consumer-protection framework and the Competition Act, highlighting the need for competition-sensitive regulatory design. It concludes that without complementary safeguards, KESONIA may inadvertently entrench market power and coordinated outcomes, undermining its stated objectives of fairness and efficiency. The paper proposes three policy responses that preserve market pricing while mitigating coordination risks: redesigning disclosure to limit collusive signalling while maintaining borrower transparency; guaranteeing open, non-discriminatory access to interbank liquidity and critical financial infrastructure; and relying on competition-based ex post monitoring rather than ex ante rate controls. Properly implemented, these measures would allow KESONIA to strengthen monetary transmission without sacrificing competition, consumer welfare, or long-run financial dynamism.

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