Ruto urges for single-digit loan rates as CBK to meet bank chiefs

Central Bank Of Kenya on Haile Selassie avenue in Nairobi. [Wilberforce Okwiri, Standard]

Pressure is mounting on commercial banks to reduce their interest on loans following a recent cut in the Central Bank Rate (CBR) to stimulate credit to small businesses and individuals. 

President William Ruto and Central Bank of Kenya (CBK) Governor Kamau Thuge yesterday asked commercial banks to consider lowering their lending rates to help spark credit growth.

This came as the banking sector regulator revealed at a meeting in Nairobi attended by the President and leading bank CEOs that it would have a roundtable with the bank executives soon to discuss the surging interest rates.

President Ruto said high rates for commercial loans by banks were hurting the economy adding that the State-backed Hustler Fund targeted by his administration at informal traders, popularly known as Hustlers, had shown it is “still possible (for any commercial bank) to do business even with single interest rates.” 

“The banking sector in Kenya is the most profitable globally, but I also want to tell you that you can do even better by lending to more people at lower rates,” said President Ruto at the meeting attended by commercial bank CEOs, including NCBA’s John Gachora and Co-operative Bank’s Gideon Muriuki.

Loan rates by banks are hurtling towards 30 per cent even as banks cut back on loans hurting low-income consumers and manufacturers alike.

The current credit crunch, said President Ruto, is alarming and harmful to the economy as he rallied banks to address the crisis. 

Doubling down on the banks, CBK Governor, Dr Thugge, said banks have "absolutely no reason" not to cut their loan rates.

“I would like to strongly urge the banks to lower their lending rates as soon as possible. This will be a win-win for both consumers, investors as well as the banks as it would stimulate economic growth by boosting credit to the private sector while at the same time addressing the rising non-performing loans of banks,” he said.

“With inflation declining steadily and expected to decline and the CBK easing monetary policy there is absolutely no reason not to have lower interest rates by the commercial banks.”

Dr Thugge revealed that the regulator would soon organise a meeting to address the loan rates. 

“Your Excellency, we have agreed with commercial banks that we will be having a meeting just to brainstorm on how to ensure that with the lower inflation and the lower CBR, they also extend lower interest rates to borrowers.”

CBK’s Monetary Policy Committee (MPC) recently cut the CBR from 12.75 per cent to 12.00 per cent, aiming to bolster economic activity amid declining inflation. 

This followed another reduction of the CBR in August from 13.00 per cent to 12.75 per cent, as the CBK hopes to foster growth amidst a backdrop of declining inflation and a revised growth forecast.

However, banks except a few major banks like Equity Group, have been slow to pass these rate cuts onto borrowers, citing concerns over rising funding costs and the quality of their loan portfolios.
Despite the CBR reduction, lending to the private sector has also declined sharply, with growth falling from 3.7 per cent in July to just 1.3 per cent in August. 

The tightening of lending standards by banks is hurting the economy as businesses and households are finding it more difficult to access credit.

This has led to a further slowdown in economic growth and a rise in unemployment. 

This contraction is largely attributed to an increase in non-performing loans (NPLs), which rose to 16.7 per cent of gross loans in August, up from 16.3 per cent the previous month.

Historically, Kenyan banks have been quick to raise rates whenever the CBK increases the benchmark rate, often citing rising costs of funds as justification.

This pattern has raised expectations that they would be equally responsive in lowering rates following the recent cut, but banks have been reluctant. 

A recent CBK survey also shows Kenya's banks are tightening their grip on deposits, opting to hold onto their piles of cash rather than extend loans to small businesses.

This cautious stance is pushing many businesses to seek alternative funding sources outside traditional banking.

Speaking during yesterday’s event, President Ruto also called on banks to increase their lending to micro, small, and medium enterprises (MSMEs), acknowledging the banking sector's commitment to doubling annual loans to these businesses starting in 2025.

The President welcomed the industry's pledge to provide Sh150 billion in new loans annually. 

He, however, urged banks to increase their lending to manufacturers at a time when the sector’s contribution to GDP growth has been declining.