Kenyan commercial banks have agreed to lower their lending rates from December 2024, following directives from the Central Bank of Kenya (CBK).
This decision follows the CBK’s recent monetary policy changes, including a 75 basis point reduction in its benchmark rate, bringing it to 11.75%—its lowest level since the pandemic.
The CBK previously issued repeated warnings about the widening gap between the Central Bank Rate (CBR) and commercial lending rates, which had reached a 31-month high in October, making obvious the slow pass-through of monetary policy adjustments to consumers.
Even with these cuts in the CBR, which had not been fully reflected in lending rates, the gap between the CBR and commercial rates continued to increase.
The average interest rate on loans increased from 16.91% to 17.15% in October, showing the reluctance of Kenyan banks to reduce borrowing costs in response to the central bank’s actions.
On December 6, CBK Governor Kamau Thugge reiterated his call for banks to align their lending rates with the lower CBR, warning that failure to do so could harm the economy.
He urged the banks to act in the same manner they had when increasing interest rates during periods of rising policy rates, emphasising that it was in their best interests to lower rates. He warned that the failure to reduce rates would have negative consequences for the economy as a whole.
Following the CBK’s pressure, the Kenya Bankers Association (KBA) announced that its 43 member banks would begin reviewing their loan interest rates, to make borrowing more affordable for both individuals and businesses.
The KBA stated that individual banks had already begun issuing notices to customers regarding the upcoming rate reductions, which will take effect from December 2024. The association also emphasised that these reductions would be gradual, in line with current changes in monetary policy and other economic factors, such as credit risk.
The implementation of the rate cuts incrementally has questions about the full immediate benefits. While the move is welcomed, the KBA has urged the CBK to consider further rate reductions to stimulate economic growth and increase access to credit.
At the same time, banks have been advised to carefully assess customers’ risk profiles, considering factors such as non-performing loans and the economic challenges that could affect borrowers’ ability to repay their debts.
As part of its initiative to address the issues impeding credit growth, the KBA is engaging with the government to tackle challenges, including the review of risk-based pricing models, resolving delayed payments to businesses, and addressing the backlog of litigation affecting credit expansion.
This latest development follows the CBK’s decision in early December to lower its base lending rate for the third consecutive month, from 12% in October to 11.25%. The CBK attributed this reduction to stable inflation, which stands at 2.8%, driven in part by a decline in the prices of goods and services.
