Commercial banks want the Central Bank of Kenya (CBK) to further trim its indicative lending rate during its next policy meeting on Tuesday, even as they admitted difficulties in passing on the benefits of previous rate cuts to borrowers.
The banks say the apex has more headroom to reduce the benchmark rate from the current 10.75 percent, on stable inflation and exchange rate and on the need to rejuvenate private sector credit growth.
“We view that there is headroom to accommodate a further Central Bank Rate cut to provide a stronger impetus and sustain the momentum for lending rate reductions in the market and unlock private sector credit growth,” the Kenya Banks Association (KBA) said in a research note preceding CBK’s policy meeting.
The banking sector lobby and advocacy group has nevertheless acknowledged that members have struggled to pass on the benefits of a lower benchmark to borrowers with the CBK already having cut the key rate by 2.25 percent from a high 13 percent in August last year.
Only five of Kenya’s 38 banks had cut lending rates to the same measure as the CBK’s benchmark as at the end of February, even as the regulator threatened fines on the institutions.
Fourteen banks had their overall weighted average lending rate increase between August last year and February 2025, defying CBK rate cuts.
Banks have previously faulted the risk-based pricing framework for the sticky high borrowing costs, saying each lender has had a different internal benchmark from which to price loans, resulting in unharmonised interest rates for borrowers.
“Acknowledging the presence of transmission lags in the market, particularly to the longer-dated credit facilities, the average lending rate in the market continued to increase (in response to the CBR hike that had been implemented and sustained at 13 percent for six months to August 2024) to 17.22 percent by November 2024, before declining steadily to 16.44 percent in February 2025,” KBA added.
“Since November 2024, the average lending rate has declined by 78 basis points compared to a decline in average deposit rates by 65 basis points to 9.76 percent in February 2025.”
Commercial bank lending rates remain high and as outliers as other domestic interest fall in tandem with the lowered CBK benchmark.
The interbank rate has for instance declined by 2.52 percent, reflecting effective policy transmission to the short end of the market yield curve.
The difficulties in policy transmission to commercial banks' borrowing rates, imply that borrowing customers might not necessarily benefit from further rate cuts as banks fail to pass on the benefits of falling interest costs.
High lending interest rates alongside exchange rate appreciation saw private sector credit drop to its lowest levels in 22 years, as borrowers were priced out.
The high borrowing costs additionally elevated the credit risk with the ratio of gross non-performing loans touching a near two-decade high of 16.7 percent in August 2024 before declining to 16.5 percent in December.
Commercial banks now want a review of the risk-based pricing framework creating an industry benchmark on which each lender bases their interest rates.
