Relief for borrowers as Kenyan banks reduce lending rates after CBK push

After months of high lending rates, commercial banks have made their first significant reduction since the Central Bank of Kenya (CBK) started slashing the benchmark rate in August last year.

This change comes in response to pressure from the banking regulator, signalling a potential shift in the lending landscape.

According to data from CBK, average lending rates fell to 16.89 per cent in December, down from 17.22 per cent in November, an eight-year high.

While this reduction marks progress, it represents only a small portion of the total 1.75 percentage points cut in the CBK's benchmark rate (CBR), which now stands at 11.25 per cent after multiple cuts since August.

Between August 6 and December 5, the CBK reduced the CBR three times from a 22-year high of 13 per cent.

Despite these reductions, banks had been slow to follow suit, continuing to raise their lending rates, prompting concerns from CBK Governor Kamau Thugge.

Lenders defended their actions, claiming they had locked in deposits at higher rates, which made it difficult to adjust their lending terms immediately.

However, four banks – Citibank NA Kenya, Standard Chartered Bank of Kenya, Victoria Commercial Bank and Stanbic Bank Kenya – have reduced their lending rates by at least 1.75 percentage points, in line with the CBR cuts.

Reduce loan defaults

This reduction in lending rates is expected to help reduce loan defaults and stimulate demand for loans, benefiting both consumers and businesses.

The lower rates could encourage consumer spending and corporate investment, offering a much-needed boost to Kenya's economy.

The rate cut also comes just ahead of the CBK's Monetary Policy Committee meeting next week, where further decisions on the CBR may be made.

The Kenya Bankers Association (KBA) has called for additional cuts in the CBR, aiming to reverse the slowdown in private sector credit growth.

CBK data indicates that between November and December, 23 banks reduced their lending rates.

Some of the largest cuts came from Citibank NA Kenya (down 1.83 per cent), Victoria Commercial Bank (down 1.76 per cent), and Stanbic Bank Kenya (down 1.38 per cent).

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Raised lending rates

However, 14 banks raised their lending rates, with Premier Bank's rate rising by 3.43 per cent, followed by Middle East Bank (up 0.83 per cent) and Habib Bank AG Zurich (up 0.14 per cent).

Among the top-tier banks, Standard Chartered Bank offered the lowest lending rate, at 15.28 per cent in December.

It was followed closely by Stanbic Bank at 15.36 per cent, with other banks like Equity, KCB, and Cooperative Bank offering rates in the range of 16 to 17 per cent.

KBA predicts that the full impact of the CBR cuts will be felt by borrowers starting in March when costly deposits locked in by banks are expected to expire.

Deposits drop

Meanwhile, average deposit rates have slightly dropped from 11.14 per cent in August to 10.45 per cent in December.

The fall in lending rates is expected to ease the burden on households and businesses that have struggled with high credit costs since the CBK began raising rates in June 2022.

These rate hikes were a response to global economic shocks and rising inflation.

Demand for credit fell by 1.1 per cent in November compared to a 3.7 per cent increase in July, the lowest in 22 years.

CBK considers a credit growth rate of 12 to 15 per cent to be ideal for supporting healthy economic growth.

With high borrowing costs, many businesses had scaled back expansion plans, and consumer spending had slowed.

However, the recent drop in lending rates is expected to encourage more borrowing for investment and consumption, providing a much-needed lift to Kenya's economic activities.