Kenyan banks are racing to reduce lending rates to respond to a directive by the Central Bank of Kenya, which has threatened financial institution with daily fines if they do not comply.
The regulator has begun to crack down on lenders who have been slow in adjusting their rates after successive Central Bank rate reductions to ease the cost for credit to businesses. Kenya’s Banking Act allows the CBK to impose fines up to KES 20,000,000 ($154,619), or three times the amount of the monetary gain, on banks that do not comply with industry regulations.
Lenders are also subject to a daily fine of KES 100,000 ($773) for each violation, while bank officials can be fined as much as KES 1,000,000 ($7,730). Leading banks such as KCB Group and Equity Group have reduced interest rates between one and four percentage points. CBK wants stimulate economic activity and help struggling households and businesses.
Equity Bank ‘s latest rate reduction this week marks its third in six months. It is the only major lender that has consistently lowered rates in response to CBK monetary policy adjustments.
The regulator wants recent monetary policies decisions to be passed on to borrowers. This is something that the banks haven’t done,” said a CBK senior official who asked to remain anonymous to speak freely. “If banks do not comply, they will face penalties.”
CBK has increased its surveillance of banks through an onsite inspection. Other banks that are not in compliance will be expected to lower their rates to avoid financial penalties.
CBK Governor Kamau Thugbe said on December 6 that banks should be fair and act the same way they did when they raised lending rates as the policy rate and treasury rate increased.
I think it is in the banks’ best interest to lower lending rates. Thugge stated that if they continue down this path, it will be a lose-lose situation for everyone and the economy won’t be able perform.
Thugge summoned executives of banks between November and December 2024 and urged them lower borrowing costs in order to support the economy. Only a few lenders, such as Equity, followed the directive.
Despite successive rate cuts, despite the widening of the gap between central bank rates and lending rates, it has reached a near three year high, raising concerns about the low level of transmission to customers.
In August, the average interest rate reached 17.22% – a record high for eight years. This cut private sector credit growth in half by 1.4%.
CBK has reduced the benchmark rate from August 2024 by 2.25 basis point to 10.75. The latest was February 5, 2025.
