Central Bank of Kenya warns of hefty fines for banks will not reduce lending rates
This announcement follows the CBK's latest reduction of its benchmark lending rate by 50 basis points, bringing it to 10.75 per cent from 11.25 per cent.
The Central Bank of Kenya (CBK) has warned banks that they will face hefty fines for failing to reduce lending rates following recent cuts in the benchmark rate.
CBK Governor Kamau Thugge announced on Wednesday that the regulator is taking stronger measures to ensure that the cost of credit drops, as part of efforts to stimulate economic activity.
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Banks that do not comply will face a fine of Sh20 million or three times their monetary gain, with an additional daily penalty of up to Sh100,000 for each loan account.
This announcement follows the CBK's latest reduction of its benchmark lending rate by 50 basis points, bringing it to 10.75 per cent from 11.25 per cent.
It also lowered the cash reserve ratio (CRR) for commercial banks to 3.25 per cent, freeing up billions of shillings to encourage lending.
However, Thugge pointed out that despite these cuts, banks have been slow to lower their lending rates, which have remained high despite the cheaper cost of borrowing.
"The committee observed that the CBR has been lowered substantially since the MPC (Monetary Policy Committee) meeting of August 2024, yet lending rates have only declined marginally," Thugge said.
In a bid to address this issue, the CBK has begun physical inspections of banks to ensure they are following the regulatory guidelines and implementing a risk-based credit pricing model (RBCPM).
On-site inspection
"To ensure that banks are implementing the risk-based credit pricing model, CBK has embarked on an on-site inspection of banks to ascertain that they are reducing their interest rates in line with the RBCPM," Thugge said.
The regulator has also invoked a law that allows it to punish banks for failing to reduce rates.
Between August and December 2024, the CBK cut the benchmark rate by 1.75 percentage points, but banks have not reflected these reductions in their lending rates.
Only a few lenders, including Citibank, Standard Chartered, and Stanbic passed on the full rate cut to borrowers.
Thugge stressed that the high cost of borrowing has discouraged borrowing, and that demand for credit contracted by 1.4 per cent in December.
"The reduction in the CRR will release additional liquidity to banks. This is expected to lower the cost of funds and lending rates, and support the growth of credit to the private sector," he said.
The CBK's latest measures aim to free up Sh73.7 billion, which banks can use to increase lending to consumers and businesses, particularly in the wake of an economic slowdown. Private sector credit has fallen to a 22-year low, exacerbated by the high cost of loans.
Thugge emphasised that lowering lending rates would support economic growth by making credit more accessible for investment and consumption.
Non-performing loans (NPLs) have risen as borrowers struggle with expensive credit.
However, the ratio of NPLs has shown slight improvement, falling to 16.4 per cent in December 2024 from 16.7 per cent in September. Some sectors, including manufacturing, trade, and real estate, have seen reductions in their NPLs.
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