CBK to penalise banks keeping loan costs high as key rate falls

The Central Bank of Kenya (CBK) has launched a crackdown on commercial banks failing to pass on the benefits of lower borrowing costs to their customers.

This is as the government seeks new ways to stimulate credit to the battered economy and the cash-hungry private sector.

In an unprecedented directive, the banking regulator said yesterday it would going forward launch on-site inspections to ensure banks pass on the benefits of rate cuts to their customers. 

The move comes at a time when the Kenyans are grappling with a liquidity squeeze as banks continue to freeze loans and exhibit reluctance in lowering lending rates despite successive reductions in the Central Bank Rate (CBR).  

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“The Committee observed that the CBR has been lowered substantially since the MPC Meeting of August 2024, yet lending rates have only declined marginally,” said MPC Chairman and CBK governor Kamau Thugge in a statement.

To enhance compliance, Dr Thugge said the CBK would embark on on-site inspections of banks to assess their compliance with the Risk-Based Credit Pricing Model (RBCPM) and ensure they are passing on the benefits of reduced funding costs to borrowers.

“To ensure that banks are implementing the Risk-Based Credit Pricing Model (RBCPM), CBK has embarked on on-site inspection of banks to ascertain that they are reducing their interest rates in line with the RBCPM,” Thugge said. 

“Under the amendments to the Banking Act recently enacted by Parliament, any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates will be penalised in accordance with the law.” 

This is the latest effort by the Kenya Kwanza government to stimulate credit to the economy.

“With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector, and support economic activity.” President William Ruto had earlier urged banks to lower lending rates, emphasizing the need to stimulate economic activity and support businesses struggling with rising costs.

However, CBK reckons many banks have not heeded its call. “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,” President Ruto said late last year during a meeting with bank CEOs.

CBK reckons that the steps to ease monetary policy and the impact on lending rates have been limited. The average lending rate remained relatively high in December, despite several rounds of rate cuts.

The banking sector, however, has argued that several factors, including the cost of funds, credit risk assessments, and operational costs, influence lending rates.

Amid mounting pressure from the Ruto government, the Kenya Bankers Association (KBA) earlier said that immediate and substantial reductions in lending rates may not be feasible.

“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,” said John Gachora, Chairman of the KBA and Managing Director of NCBA Group, late last year.