Kenyan banks have finally agreed to begin lowering lending rates in a bid to ease access to credit and support the country’s economic recovery. This landmark move follows successive cuts to the Central Bank Rate (CBR) by the Central Bank of Kenya (CBK), now standing at 11.25 per cent.
The Kenya Bankers Association (KBA), in a recent statement, confirmed the sector’s commitment to reducing the financial burden on borrowers caused by high borrowing costs. Starting in December 2024, banks will progressively lower interest rates on loans and notify customers about these adjustments. These reductions will align with monetary policy changes and shifts in credit risk factors.
KBA Chairman John Gachora reiterated the sector’s dedication to creating a lending environment that is accessible, affordable, and sustainable. Highlighting the importance of empowering households, businesses, and the broader economy, Gachora stated: “Our aim is to provide borrowing channels that effectively support individuals, households, and businesses to thrive for the good of the economy.”
While lending rates are set to drop, the changes will occur gradually. Gachora explained that banks rely on deposit mobilization to issue loans, and deposits are locked at higher rates before the CBR cuts continue to influence lending costs. As these high-cost deposits mature, they will be replaced by lower-cost ones, enabling banks to lower interest rates further.
How Banks Determine Lending Rates
Loan pricing hinges on a risk-based credit model, where a borrower’s creditworthiness influences the interest rates charged. Factors include the CBR, the cost of government borrowing, and a customer-specific risk premium, which accounts for credit history, repayment ability, and economic conditions. Borrowers with strong credit profiles benefit from lower rates, while higher-risk individuals face steeper costs.
Despite the initiative, several challenges persist. Rising living costs, delayed government payments to businesses, and reduced consumer spending continue to strain the lending environment. These factors, coupled with increased consumer risk, limit banks’ ability to offer uniformly lower rates.
To address these issues, KBA is collaborating with the government to review risk-based pricing models, expedite supplier payments, and resolve commercial litigation backlogs. These measures aim to create a fairer and more supportive credit landscape.
As rate reductions take effect, banks will notify borrowers about changes to their loans. KBA has urged customers to stay informed, monitor communications from their banks, and understand their credit risk profiles, which influence their loan terms.
The CBK has been pushing lenders to lower interest rates and pass the benefits of a reduced CBR to customers. While a few banks, such as Equity Bank and NCBA, have responded, most institutions have been slow to comply, prompting CBK Governor Dr. Kamau Thugge to summon bank CEOs over their reluctance.
With lending rates finally set to drop, this move is poised to spur private sector growth and stimulate the Kenyan economy. As banks begin implementing these changes, borrowers are encouraged to engage actively with their financial institutions to maximize the benefits.
