Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Commercial banks’ loan margins fall to 10-month low on rate cuts
The CBR has remained unchanged since February as the regulator assesses the impact of earlier monetary policy decisions. The next meeting to decide on the current rate is set for October 7.
The gap between what banks operating in Kenya charge on loans and pay on deposits narrowed to a 10-month low of 7.46 percentage points in July as lenders strike a balance between appeasing borrowers and attracting savers.
This means that the financial institutions are earning less profits on loans than before, with those having smaller non-interest income feeling the biggest pressure.
Central Bank of Kenya (CBK) data shows the spread, which measures the difference between the average lending and deposit rates, fell from 7.53 percentage points in June and 7.86 points in February, when it hit the highest level in nearly 10 years.
The July reading was the narrowest since September last year when the spread stood at 7.44 percentage points.
The latest figure marks the fifth straight month of narrowing spread, marking a reversal from the period between June last year and February last year when it was widening month-on-month.
The narrowing spread came as banks raised the average rate paid on deposits while keeping lending rates largely stable, pointing to rising competition for customers' savings even as they heed to the CBK drive to offer loans at rates linked to the Central Bank Rate (CBR).
CBK and customers have been demanding lending rates that mirror the reduced CBR. On the other hand, banks have been cautious in cutting deposit rates sharply to avoid losing deposits to competing investment options such as money market funds and equities in a year the Nairobi Securities Exchange (NSE) has seen more than 40 percent gain.
Concerns about the mismatch between lending rates and CBR had prompted CBK Governor Kamau Thugge to intervene more directly through moral suasion and threat of daily fines to improve rate transmission.
The movement in rates comes as the CBK maintains its benchmark CBR at 8.75 percent after cutting it by 75 basis points in February from nine percent.
The CBR has remained unchanged since February as the regulator assesses the impact of earlier monetary policy decisions. The next meeting to decide on the current rate is set for October 7.
The average lending rate rose marginally to 14.39 percent in July from 14.37 percent the previous month. In contrast, the average deposit rate increased to 6.93 from 6.84 percent over the same period.
Earlier, the decline in the lending rate had been more pronounced compared to the movement in deposit rates. The average lending rate fell from 16.64 percent in January 2025 to 14.39 percent in July this year, a reduction of 2.25 percentage points.
In the same period, the average deposit rate declined from 10.05 percent to 6.93 percent, a 3.12 percentage-point drop.
The wider spread recorded earlier in the year was partly a result of deposit rates falling faster than lending rates. The gap peaked at 7.86 percentage points in February before beginning a gradual decline.
The latest data offers some relief to borrowers when compared with 2024 levels. The average lending rate reached a recent high of 17.22 percent in November 2024 as banks adjusted their pricing to reflect tighter monetary conditions and higher funding costs.
Lending rates have been softening as the CBK shifted towards monetary easing. Last year, the regulator cut the CBR six times, building on the easing that started in August 2024 when the rate was cut from a nine-year high of 13 percent.
The reduction in lending rates has been accompanied by a gradual recovery in demand for credit, after high borrowing costs and economic uncertainty weighed on loan growth.
For savers, however, the decline in deposit rates means returns on bank deposits have continued to fall from the highs recorded during the period of tight monetary policy.
The average deposit rate stood at 11.48 percent in June 2024 before declining to 8.37 percent in June last year and 6.93 percent in July 2026.
Last year, CBK reviewed the risk-based pricing framework, establishing a common base lending rate for all banks, based on the overnight-interbank lending rate, renamed the Kenya Shilling Overnight Interbank Average (Kesonia).
Kesonia is closely tied to the CBR under the interest-rate corridor framework, where overnight lending rates for borrowing between banks are held at no more or less than 0.75 percent of the benchmark.
The total cost of credit to a borrower equals Kesonia plus a premium denoted as K, which is determined according to the risk profile of every customer, but also factors in bank margins plus expected returns to shareholders.
