Banks’ profit margin receded to 6.44 percent in March as lenders responded to warnings from the Central Bank of Kenya (CBK) by lowering the average lending rate to 15.77 percent, in line with the regulator’s policy cut.
However, banks also lowered deposit rates to 9.33 percent, leaving them with a spread, or profit margin, of 6.44 percent, down from an eight-year high of 6.81 percent last November.
The 6.81 percent interest spread - the difference between the interest rate a bank charges when it gives out loans and the interest rate it pays depositors when they save money - was the widest since May 2016, just before Parliament enacted a law that capped lending rates.
The wide spread prompted the CBK to intervene, warning of hefty penalties to commercial banks that did not cut their lending rates in line with the lowering of the central bank rate (CBR), the rate at which the regulator lends to financial institutions.
In November 2024, banks charged borrowers an average of 17.22 percent, while giving depositors an average of 10.41 percent, resulting in a profit margin of 6.81 percent compared to 4.95 percent in November 2023.
Interest spreads started to widen last year as banks raised their lending rates at a faster rate than their deposit rates.
“The spread is widening due to the implementation of risk-based pricing, leading to elevated loan rates versus declining deposit rates,” said Melodie Gatuguta, a research associate at Standard Investment Bank (SIB).
With risk-based pricing, banks and financial institutions set loan interest rates based on the credit risk of individual borrowers rather than applying a uniform rate.
Despite the CBK cutting its benchmark lending rate, banks last year were reluctant to cut theirs, enabling them to enjoy higher margins for longer.
Banks posted a 15.9 percent rise in pre-tax profit to Sh262.3 billion last year, from Sh226.3 billion in 2023, defying an environment of increased loan defaults and reduced appetite for borrowing.
Due to sustained pressure from the CBK, most banks have been lowering their lending rates in line with the policy cuts.
The overall weighted average lending rates of Access Bank of Kenya, ABC, DIB Bank Kenya, Kingdom Bank and Guardian Bank Limited went up in March, data from the CBK shows.
All the other commercial banks cut their lending rates in March, except for Consolidated Bank of Kenya whose rates remained unchanged at 13.31 percent.
CBK deputy governor Susan Koech last week warned banks not lowering their lending rates in response to the cut in the CBR, saying disciplinary action would be taken against those institutions.
“CBK has taken a number of initiatives by further reducing the central bank rate, an action aimed to stimulate the economy by making borrowing cheaper for businesses and individuals but some banks have failed to reduce their base lending rates, we are closely monitoring their activities,” she warned.
“When CBK increased lending rates, commercial banks were quick to adjust their loans upwards but this we are not seeing when we lower it.”
A few months ago, the Kenya Bankers Association said in a statement that the process of lowering loan rates would take time, as this is guided by a risk-based credit pricing model.
