Kenya’s banking sector is facing a major shake-up as commercial banks begin lowering interest rates on loans in response to mounting pressure from the Central Bank of Kenya (CBK).
On Tuesday, February 11, Kenya Commercial Bank (KCB) announced a reduction in its base lending rate from 15.6% to 14.6% per annum, effective from February 10, 2025. This move follows a stern warning from CBK Governor Dr. Kamau Thugge, who has put banks on notice for failing to pass on the benefits of lower borrowing costs to their customers.
CBK’s Tough Stance on Interest Rates
Dr. Thugge has been vocal about the reluctance of commercial banks to lower interest rates, despite CBK’s recent adjustments to the Central Bank Rate (CBR) and Cash Reserve Ratio (CRR). He has warned that banks that fail to comply will face severe penalties, including fines of up to Ksh 20 million or three times the value of any undue benefits gained from maintaining high lending rates.
“Under the amendments to the Banking Act recently enacted by Parliament, any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates will be penalized in accordance with the law,” Dr. Thugge stated.
To enforce compliance, CBK has initiated on-site inspections of five major lenders and has signaled its intent to impose hefty fines on non-compliant banks.
KCB’s Move to Boost Economic Growth
KCB, one of the country’s leading lenders, stated that the reduction in interest rates is expected to spur economic growth by enhancing access to credit for businesses and individuals.
“The reduction is expected to enhance credit to the private sector and effectively spur economic growth,” the bank said in a public notice.
The new 14.6% base lending rate applies to both existing and new Kenya Shilling-denominated loans, excluding fixed-rate credit facilities. KCB emphasized that the final lending rate would still depend on a customer-specific margin determined by its Risk-Based Credit Pricing Model.
This move is expected to encourage other banks to follow suit, ensuring that businesses and consumers benefit from more affordable loans, which in turn will stimulate economic activity and job creation.
Co-op Bank Also Lowers Lending Rates
KCB’s announcement came just a day after Co-operative Bank (Co-op Bank) lowered its lending rate from 16.5% to 14.5% per annum, effective immediately from February 11. This adjustment places Co-op Bank among the first financial institutions to respond to CBK’s directives, further signaling a shift towards cheaper credit for borrowers.
High Lending Rates Have Stifled Economic Growth
Despite CBK’s efforts to create a more favorable borrowing environment, interest rates in Kenya have remained stubbornly high, limiting access to credit and slowing down business activities.
In December 2024, the average lending rate remained elevated, exacerbating the cash crunch and reducing consumer spending. Banks have often cited factors such as high costs of funds, credit risk assessments, and inflationary pressures as reasons for maintaining higher rates.
However, with CBK tightening its grip on the sector, more banks are expected to align with the regulator’s push for lower borrowing costs, making loans more accessible to businesses and individuals alike.
What’s Next for Borrowers?
With KCB and Co-op Bank setting the pace, more commercial banks are likely to reduce their interest rates in the coming weeks to avoid CBK’s penalties. This could mark the beginning of a more affordable lending environment, benefiting businesses looking to expand and individuals seeking loans for personal or investment purposes.
As CBK continues to monitor compliance, borrowers should keep an eye on changes in lending rates across different banks to ensure they secure the most competitive loan terms available. For now, KCB and Co-op Bank customers can take advantage of lower borrowing costs, signaling a potential turnaround for Kenya’s lending landscape.