Kenyan commercial banks are racing to cut lending rates in response to a directive from the Central Bank of Kenya (CBK), which has threatened financial institutions with daily fines for non-compliance.
The regulator is cracking down on lenders that have been slow to adjust their rates following successive Central Bank rate cuts to ease the cost of credit for businesses. According to Kenya’s Banking Act, the CBK can impose fines of KES 20 million ($154,619) or three times the monetary gain on banks that fail to comply with industry regulations.
Lenders also face a daily penalty of KES 100,000 ($773) per violation, while bank officials may be fined up to KES 1 million ($7,730). Leading banks, including KCB Group, Equity Group, Cooperative Bank, I&M, and DTB, have cut interest rates by one to four percentage points. CBK wants to stimulate economic activity and support struggling households and businesses.
Equity Bank’s latest rate cut this week marks its third reduction in six months, making it the only major lender to have consistently lowered borrowing rates in response to CBK’s monetary policy adjustments.
“The regulator wants recent monetary policy decisions to be passed down to borrowers, which the banks have not,” said a senior CBK official who asked not to be named to speak freely. “If banks don’t comply, they will be penalized.”
The CBK has increased surveillance of banks with an onsite inspection to ensure lenders price their loans pegged on their risk-based models and the falling central bank rate. Other banks that have not complied are expected to cut their rates to avoid unnecessary financial penalties.
“All we are asking is for banks to be fair and to act in the same way that they were quick to raise lending rates when the policy rate was increasing and the treasury rates were increasing,” CBK Governor Kamau Thugge said on December 6.
“I think it’s in banks’ interest to lower their lending rates. If they continue on this path it will be a no-win for anyone and the economy will not be able to perform,” Thugge said. Between November and December 2024,
Thugge summoned bank executives and urged them to lower borrowing costs to support the economy. Only a handful of lenders, like Equity, complied with the directive.
Despite three successive rate cuts, the gap between the central bank rate and lending rates has widened to a near three-year high, raising questions about the low transmission of monetary policy changes to customers.
The average interest rate hit 17.22%, an eight-year high, cutting private sector credit growth by 1.4%.
Since August 2024, CBK has cut the benchmark rate by 2.25 basis points to 10.75, with the latest being February 5, 2025.
