Only five of Kenya’s 38 banks had cut lending rates to match the reduction of the benchmark rate by the Central Bank of Kenya (CBK) at the end of February amid threats of daily fines.
Between August 6 and February 5, the CBK cut the benchmark rate or central bank rate (CBR) four times by 2.25 percentage points to 10.75 percent from a 22-year high of 13 percent that lasted about seven months.
Just five lenders— Citibank NA Kenya, Absa Bank, Standard Chartered Bank of Kenya, Victoria Commercial Bank and Stanbic Bank Kenya—had cut their rates by at least 2.25 percentage points at the end of February.
This comes amid pressure from the regulator, which announced that it would not hesitate to impose daily fines on banks that are reluctant to reduce lending rates in line with cuts on the benchmark rate.
Bank profits surged as they passed the higher interest rates on to borrowers far more quickly than to savers, whose deposits dropped by Sh389 billion last year—helping the lenders to ease the burden of paying returns on cash sitting in their vaults.
Fourteen banks, including Access Bank, Premier Bank, Cooperative Bank and Ecobank, increased their lending rates during the period, according to the latest CBK filings.
Another 19 banks cut their lending by a narrower margin of between 0.01 percent and 1.55 percent between August and the end of February.
A few banks made cuts in March, and the CBK has not captured their numbers in the latest filings.
The majority of the banks reckoned they had locked in deposits used for loans at higher rates, arguing that the costly savings had slowed down efforts to lower borrowing costs.
The chief executive officers of commercial banks have accelerated the push for the review of the loan-pricing formula, blaming it for the distortion of borrowing costs.
Kenya Bankers Association (KBA) chairman John Gachora, who is also the NCBA managing director, said borrowers have failed to earn relief from falling interest rates because lenders set different base rates in the current pricing formula.
Loan charges are based on a bank’s base rate and individual borrower risk profiles—which has a big influence on the average lending rate.
“What is clear is that risk-based pricing needs a little bit of streamlining to remove some of the concerns. Banks have done a lot of work to reduce interest rates, but it is not very visible because each of us has a different rate,” he said in a previous interview. “Harmonising the rates is important both to us and to the CBK.”
The high cost of borrowing had discouraged borrowers from tapping loans in an economic setting where demand for products is sluggish, prompting firms to freeze hiring and expansion plans.
The drop in the cost of loans is expected to prompt consumers to take up funds for investments and consumption in the coming months, boosting economic activities.
Private sector credit dipped to a new 22-year low in December following a contraction that the CBK blamed on costly loans.
Standard Chartered Bank Kenya chief executive officer Kariuki Ngari said lenders need a solution that would ensure lending rates closely track movements in the CBK’s benchmark rate.
“Last year, interest rates were only moving in one direction which was up, now interest rates are coming down, we have to go back to the model and see whether the adjustment is as fast as that of the CBR and what needs to be done if it isn’t the case,” he said.
The CBK reckons that some banks have declined to react to policy changes to stimulate the economy, pushing the regulator to invoke for the first time a law that allows the punishment of banks on failure to comply with regulatory actions.
Top banks scrambled to cut lending rates days after the CBK warned of daily fines in February, but the effect of the reduced costs is yet to be felt.
Equity Bank Kenya, KCB Bank Kenya and Co-operative Bank Kenya announced cuts of between one and three percentage points in the aftermath of the monetary policy committee meeting in February 5.
Equity slashed its Equity Bank reference rate (EBRR) to 14.39 percent from 17.39 percent plus a margin dependent on each borrower’s risk profile.
KCB slashed its base rate to 14.6 percent from 16.6 percent while Co-op Bank cut its benchmark to 14.5 percent from 16.5 percent.
Top banks will return a record Sh85.27 billion to shareholders as lenders lifted dividends on the back of costly loans that helped deliver bumper profits.
The nine top-tier banks increased dividends by 35 percent from their profits that jumped 25.6 percent to Sh231.5 billion
The tier I banks—KCB Group, Equity Group, Co-operative Bank of Kenya, NCBA Group, Standard Chartered Bank of Kenya, Absa Bank of Kenya, I&M Group, Stanbic and Diamond Trust Bank— saw their net profit rise by between 10 percent and 66 percent.
Banks have emerged as the big winners in a soft economy that is weighed down by high interest rates, as companies in other sectors struggle to generate profits and give returns to their shareholders in the form of dividends.
“We are conducting onsite inspections to determine if the cost of funds for banks has gone down. If it has, then we expect lending rates to follow suit,” CBK Governor Kamau Thugge told MPs last month.
“If banks are found to be profiting unfairly by not adjusting rates downward, they will face penalties equal to three times their unjust gains, as provided under the Business Laws (Amendment) Act.”
Companies in sectors such as manufacturing, services, investments, energy and agriculture have reported significantly lower profit growth in 2024 relative to banks, whose earnings were boosted by high interest rates in the economy.
The non-bank firms have cited factors such as reduced demand for goods and services, high cost of credit, exchange rate fluctuations and costlier inputs as some of the reasons for their slow earnings growth.
