Banks raise loan margins as deposit rates decline

Commercial banks have widened their lending margins by lowering returns on deposits faster than the cost of loans, ensuring they maintain profitability.

This trend, highlighted in data from the Central Bank of Kenya (CBK), has seen interest rate spreads grow over recent months.

Lending margins, which represent the difference between the interest banks charge on loans and what they pay depositors, are a key indicator of profitability.

These margins are influenced by factors such as credit risk, operational costs, and market dynamics.

Since August last year, when domestic interest rates started declining, banks have adjusted deposit rates at a quicker pace than lending rates.

In February 2025 the lending margin rose to 6.65 percent, up from 6.59 percent in January and 6.44 percent in December.

This increase is due to deposit rates falling from 11.14 per cent in August to 9.76 per cent in February, while the average lending rate moved only slightly, from 16.84 per cent to 16.41 per cent.

Bank executives have acknowledged that borrowing costs remain high, partly due to variations in risk-based loan pricing models among different lenders.

"Each lender has a different benchmark from which loan interest rates are set, resulting in a minimal adjustment to borrowing costs across the industry," they said.

Discussions are underway between banks and the CBK to review the risk-based loan pricing framework.

The aim is to establish a uniform benchmark interest rate for all banks. This would help develop a standardized borrowing cost structure while considering factors such as funding costs and customer risk profiles.

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