The Central Bank of Kenya (CBK) has urged commercial banks to swiftly reduce their lending rates following recent monetary policy adjustments. Governor Kamau Thugge emphasized the need for fairness, pointing out that banks have historically been quick to raise rates when the Central Bank Rate (CBR) increases but slow to adjust downward when the CBR is reduced.
Speaking during a post-Monetary Policy Committee (MPC) briefing on Friday, Governor Thugge highlighted the disparity. “When the Central Bank raised the policy rate, the banks were very quick to raise their lending rates. All we are asking is for the banks to be fair and to act in the same way now that the policy rate is declining,” he said.
MPC Announces Third Consecutive Rate Cut
The MPC, during its meeting on Thursday, announced a reduction in the CBR to 11.25%, down from 12% in October and 12.75% in August. This marks the third consecutive rate cut in 2024. The move is supported by stable inflation, the shilling’s stability, and a favorable global economic outlook. By lowering rates, the CBK aims to encourage more lending to the private sector, thereby catalyzing economic growth.
Despite the monetary policy adjustments, the response from commercial banks has been mixed. While some banks have reduced their lending rates, others remain resistant, with interest rates still as high as 21% in some cases.
Banks’ Response to Rate Cuts
Notable banks such as DTB and Cooperative Bank have been at the forefront of offering cheaper loans among major lenders, with overall interest rates of 12.44% and 14.88%, respectively, as of last month. Smaller banks such as Premier Bank and Access Bank offer even lower rates of 9% and 11.42%.
On the other hand, larger, listed lenders such as KCB, I&M, and Absa continue to offer loans at significantly higher rates of 16.02%, 18.24%, and 20.02%, respectively. Mortgage-focused lender HFC has maintained rates at 20.5%, among the highest in the market.
Equity Bank recently announced a reduction in interest rates for all new and existing shilling-denominated credit facilities, with CEO James Mwangi stating the move aligns with the MPC’s monetary policy actions. Similarly, NCBA reduced its rates on new loans to 16.91% in October.
Balancing Economic and Political Pressures
The CBK’s call for aggressive rate cuts has sparked debate within the banking sector. While some lenders view the push as politically motivated, given the government’s own borrowing at high rates, the central bank insists the adjustments are necessary for economic stability and growth.
Governor Thugge argued that reducing rates would benefit both the economy and the banking sector. “It is in the interest of banks to lower their lending rates as it will stimulate economic activities, leading to a win-win scenario. Banks will profit from increased loan uptake, while the economy benefits from enhanced credit flow,” he explained.
Economic Growth Slows
The CBK’s plea comes amid signs of economic slowdown. Kenya’s real GDP growth averaged 4.8% in the first half of 2024, down from 5.5% during the same period in 2023. Lending to the private sector also remained broadly unchanged in October 2024 compared to the previous year.
Way Forward
The CBK’s stance underscores the need for collaboration between regulators and financial institutions to achieve economic recovery. With lower lending rates, the private sector could access affordable credit, fostering investments and consumption that are vital for economic growth.
As monetary policy continues to ease, the spotlight will remain on commercial banks to adjust their rates promptly. The central bank’s message is clear: lenders must balance profitability with their role in supporting economic development. Whether banks will heed this call in a timely manner remains to be seen.
