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Banks slash returns on deposits to 15-month low
CBK lowered the CBR thrice by a cumulative 2.25 percentage points to 10.75 percent, from a 22-year high of 13 percent between February 6 and August 5 last year.
Banks cut interest on deposits to an average 15-month low of 9.76 percent in February, signalling the continued reversal from the past two years when they were increasing the returns to attract savers.
The latest Central Bank of Kenya (CBK) data shows the February rate was a decline from 10.05 percent in January, moving closer to the November 2023 average of 9.48 percent. The latest deposit rate is also the first time in 15 months that the figure has fallen below double digits.
The decline in the deposit rate comes on the back of the reduction in the Central Bank Rate (CBR) and falling returns on government papers, especially the 91, 182-day Treasury bills, whose rates have dropped below 10 percent.
This is the third straight month of the deposit rate falling.
The peak was last June when the rates averaged a 26-year high of 11.48 percent, only beaten by the 12.99 percent seen in December 1998. Banks were raising deposit rates to lure savers from directing deposits into government paper where returns were rising.
For instance, Kenya’s nine top banks paid customers Sh306.24 billion as interest on deposits in nine months ended last September, marking a 26.1 percent growth from Sh242.85 billion in the preceding similar period.
The biggest driver of the higher interest expenses was due to a jump in the returns paid to depositors. The falling deposit rates are therefore a relief for banks even as they also adjust downwards the pricing of loans in the wake of CBR cuts and pressure from the CBK.
CBK lowered the CBR thrice —between August 6 last year and February 5— by a cumulative 2.25 percentage points to 10.75 percent, from a 22-year high of 13 percent between February 6 and August 5 last year.
Banks have responded with cuts in lending rates, albeit at a slower pace. The average lending rate had risen to an eight-year high of 17.22 percent last November but has been declining for three straight months to close February at 16.41 percent—the best for borrowers in 11 months.
The returns on deposits and the interest rate on loans are expected to continue trending downwards as banks ask for aggressive cuts in the CBR in an environment of relatively stable exchange rate and inflation contained within the 2.5 percent and 7.5 percent targeted range.
The CBK monetary policy committee is set for another CBR review on April 8. All the previous four meetings have delivered cuts.
CBK has accused banks of not passing the full benefits of CBR cuts to customers. However, banks have argued that their risk-based pricing models will require an overhaul to respond fast enough to CBR changes.
The decision by CBK to cut loan rates amid stable exchange rate and cooled inflation has mirrored what is happening in other jurisdictions such as the US and UK.
