Kenyan Banks Agree to Lower Lending Rates After Pressure from Central Bank Directive

Just two days after the Central Bank of Kenya (CBK) issued a directive urging banks to lower their lending rates, banks have finally given in to the pressure.

In a statement issued by the Kenya Bankers Association (KBA) Chairperson John Gachora, on Sunday, December 8, the bankers have agreed to heed the directive.

However, KBA acknowledged that banks are facing adverse challenges from the prevailing economic situations even as they agreed to the directive, raising questions on the viability of the acceptance. 

”The Kenya Bankers Association (KBA) recognises the challenges individuals and businesses face arising from the prevailing high cost of loans and the role that the Central Bank of Kenya plays in guiding the market on credit pricing,” KBA stated.

”The recent successive cuts in the Central Bank Rate, have implications on both deposit and lending rates in the market. Banks are taking steps to lower interest rates and make borrowing more affordable,” it added.

The bankers also revealed that individual banks have already enrolled in the process of issuing notices to their customers over the new loan rates.

However, they announced that they would not instantly reduce the rates but would instead do it progressively to also cushion them from financial shock. An announcement that is likely to offend CBK and is likely to be brought up in the next meeting with the association, sometime next week.

This means that customers will not immediately enjoy the cuts in borrowing rates which was capped at 11.25 per cent.

”Individual banks are issuing the requisite notices to customers indicating reductions in loan rates from December 2024 and these reductions will continue progressively in line with the evolution of monetary policy and credit risk factors,” KBA stated.

”As the business of banking involves mobilizing deposits and extending loans from the pool of deposits, we will continue to progressively reduce the loan interest rates balancing against the prolonged high cost of customers’ deposits that were locked in during a period of higher interest rates before the Central Bank of Kenya initiated interest rate cuts,” it added.

Meanwhile, banks have been urged to asses their customers’ risk profiles accordingly as they progress to the new lending rates by the CBK. This, KBA said would help the banks assess conditions such as non-performing loans and any challenges that customers face that may constrain their ability to service loans.

Additionally, KBA announced that it will continue engaging with the government to address the standoffs that have been impeding credit growth and in particular the issue of lending rates, which has been equally a contentious issue.

”To unlock access to affordable credit, KBA is working closely with the Government and other stakeholders to address the broader issues that impede credit growth, including review of the risk-based pricing models, resolution of delayed payments to businesses and unlocking litigation backlog,” it announced.

On Thursday, December 5, the Central Bank lowered its base lending rate for the third successive month by 75 basis points from 12 per cent in October to 11.25 per cent in December.

CBK Governor Kamau Thuge attributed the decision to stable inflation which currently stands at 2.8 per cent. According to him, stability in inflation was prompted by a drop in the prices of goods and services.