Banks now say loan rates drop will be gradual in row with CBK

The umbrella body representing Kenya’s 39 commercial banks now says that any reductions in their lending rates will be gradual and dependent on economic conditions. 

In reply to mounting pressure from the banking regulator and President William Ruto’s government to lower loan rates, the Kenya Bankers Association (KBA) yesterday emphasized the banking sector’s cautious stance.

This comes in the wake of the Central Bank of Kenya’s (CBK) recent decision to lower its key lending rate to 11.25 per cent, aimed at improving credit access for consumers and businesses.

Last week marked the third time this year that the regulator has cut its key lending rate, setting it at 11.25 per cent to stimulate credit access for Kenyans. 

Yesterday, KBA chairman and Managing Director of tier-one lender NCBA Group John Gachora said in a paid-up advertisement in newspapers that any expected cuts would be progressive.

“Individual banks are issuing the requisite notices to customers indicating reductions in loan rates from December 2024 and these reductions will continue progressively in line with the evolution of monetary policy and credit risk factors,” Gachora stated. 

KBA reckons that since the banking system operates by mobilising deposits and issuing loans from the same pool, it therefore follows according to the lobby that existing higher-cost deposits will continue to impact the cost of funds for some time.

Gachora said many deposits were locked in at higher rates before the recent cuts, which affects the banks’ ability to lower lending rates immediately. 

“As the business of banking involves mobilising deposits and extending loans from the pool of deposits, we will continue to progressively reduce the loan interest rates balancing against the prolonged high cost of customers’ deposits that were locked in during a period of higher interest rates before the Central Bank of Kenya initiated interest rate cuts,” he noted.

He added that the process of determining lending rates is guided by a risk-based credit pricing model, which assesses borrowers based on their credit profiles. 

 This model, he said, ensures that rates reflect both the bank’s base rate and the specific risk associated with each borrower. Consequently, he said that while individuals and businesses with strong credit histories may benefit from lower rates, those deemed higher risk could still face elevated costs.

Despite the promise of eventual reductions, Gachora acknowledged the significant economic pressures that could complicate matters. 

 Rising living costs, he noted, have diminished consumers’ ability to service loans, while delayed payments to businesses—especially those reliant on government contracts—have created additional challenges. 

 “While the base rates primarily reflect the Central Bank Rate (CBR) and the cost of borrowing by the government, the customers’ risk premiums mirror the market conditions such as the level of non-performing loans and any challenges that customers face that may constrain their ability to service loans,” he said.

“We acknowledge that many borrowers continue to face financial strains driven by the increased cost of living and of doing business; the protracted challenge of delayed payments to businesses; and generally low business activity due to reduced consumer demand arising from reduced disposable incomes. These challenges elevate consumer risks and constrain lending at lower rates.”

He emphasized that the government must prioritise settling outstanding bills to improve cash flow for businesses. 

“To unlock access to affordable credit, KBA is working closely with the government and other stakeholders to address the broader issues that impede credit growth, including a review of the risk-based pricing models, resolution of delayed payments to businesses and unlocking litigation backlog,” Gachora stated. The recent CBR cut, the third in a row, was influenced by a decline in overall inflation, which is expected to remain below the target midpoint due to stable fuel prices and exchange rate stability, said CBK. However, banks tightening their lending standards could hinder these efforts, limiting access to funds and potentially stalling economic growth, the CBK has warned.

 Pressure has been mounting on commercial banks in the country to reduce high lending rates for their loans following the recent cuts in the benchmark rate to stimulate credit to small businesses and individuals. 

Recently, President Ruto asked commercial banks to consider lowering their lending rates to help spark credit growth.

The Head of State 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 Mr Gachora.

Loan rates by banks had at the time been hurtling towards 30 per cent even as banks cut back on loans hurting low-income consumers and manufacturers. 

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

Doubling down on the banks, CBK Governor Kamau Thugge has also repeatedly said banks have no reason not to cut their loan rates.