Kenyan Banks to Lower Lending Rates in Line with CBK Directive

In a move aimed at boosting economic growth and easing financial strain on borrowers, Kenyan commercial banks will lower their lending rates beginning December 2024. This development follows a directive from the Central Bank of Kenya (CBK) and recent adjustments to monetary policy, including a reduction of the benchmark rate to 11.75%.

Addressing the Gap Between Policy and Practice

The CBK raised concerns over the widening disparity between the Central Bank Rate (CBR) and commercial lending rates, which peaked at a 31-month high in October. Despite multiple reductions in the CBR, banks had been slow to translate these changes into lower borrowing costs for consumers, resulting in persistently high average interest rates.

Under pressure from the CBK, the Kenya Bankers Association (KBA), representing 43 member banks, has agreed to review and gradually reduce loan interest rates. The KBA emphasized that these reductions will align with prevailing monetary policy and broader economic conditions, with the goal of making credit more accessible for both individuals and businesses.

Balancing Affordability and Risk

While the planned rate cuts are a welcome development, their gradual nature raises questions about their immediate impact on borrowing costs. The KBA has urged the CBK to consider additional reductions in the CBR to further stimulate credit growth and economic activity. At the same time, banks have been encouraged to conduct thorough risk assessments to mitigate the potential risks of increased lending.

To address structural challenges affecting credit growth, the KBA is working closely with the government to:

• Refine risk-based pricing models.
• Resolve issues around delayed payments to businesses.
• Clear the backlog of legal disputes impacting financial transactions.

A Step Towards Economic Recovery

The announcement comes on the heels of the CBK’s decision earlier in December to lower the base lending rate for the third consecutive month. This move reflects improved economic conditions, including stable inflation and declining prices for goods and services.

As Kenyan banks implement these rate adjustments, the collaboration between regulators, financial institutions, and the government highlights a shared commitment to creating a more inclusive and dynamic financial ecosystem that supports economic recovery and sustainable growth.