Co-op Bank cuts lending rate as pressure mounts on rivals to follow

Co-operative Bank of Kenya (Co-op Bank) has emerged as the first major lender to reduce its lending rate following last week's reduction of the benchmark Central Bank Rate (CBR).

In a public notice issued Monday, the bank announced a substantial two per cent cut in its base lending rate from 16.5 per cent to 14.5 per cent per annum, effective immediately.

The decision comes at a crucial time for many Kenyans grappling with rising living costs.

Co-op Bank's move is expected to exert pressure on other leading lenders, including KCB, Equity, NCBA and DTB, to follow suit, potentially ushering in a new era of more affordable loans within the banking sector.

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This action aligns with intensified efforts by Central Bank of Kenya (CBK) to stimulate credit growth.

On February 5, the Monetary Policy Committee (MPC) cut the by 50 basis points to 10.75 per cent, marking the fourth consecutive reduction.

As the first bank to respond significantly to the CBR adjustment, Co-op Bank's rate reduction is anticipated to prompt a broader market response, with other financial institutions likely to follow its lead.

A reduction in lending rates across the board would prove

de timely relief for borrowers and the economy as a whole, especially as many Kenyans face financial strain.

Coop Bank Group managing director Gideon Muriuki said the rate reduction reflects the bank's commitment to supporting key sectors of the economy, particularly micro, small, and medium enterprises, which are crucial for economic growth.

The effective lending rate will be calculated based on the base lending rate plus a margin tailored to individual credit profiles, ensuring that the benefits extend to a diverse customer base.

"The reduction in lending rates aims to stimulate credit growth, particularly at a time when numerous businesses are struggling to sustain operations due to escalating costs," Muriuki said.

"We believe this initiative will encourage borrowing and facilitate economic recovery."

Borrowers and regulators will be closely monitoring other financial institutions to see if they will also take action to ease the burden on borrowers during this economic strain.

Analysts predict that Co-op Bank's cut will intensify competition among lenders, compelling them to reconsider their rates.

CBK has noted that, despite previous monetary policy adjustments, many banks have been slow to lower their lending rates.

Recent reports indicate that average lending rates across the sector remain elevated, with some institutions charging rates exceeding 20 per cent per annum, even with the lowered CBR.

MPC chairman and CBK governor Kamau Thugge expressed concern that the benefits of the reduced CBR have not been adequately reflected in lending rates.

"The committee observed that lending rates have only decreased marginally, despite significant CBR reductions," Thugge said after the MPC meeting last week.

President William Ruto has also urged banks to lower their lending rates to stimulate economic activity and support businesses facing rising costs.

"The banking sector in Kenya is the most profitable globally, but you can do even better by lending to more people at lower rates," Ruto said during a recent meeting with bank CEOs.

While CBK has made efforts to ease monetary policy, the impact on lending rates has been limited.

The average lending rate remained relatively high in December, despite multiple rounds of cuts, exacerbating the cash crunch and hindering business activities and consumer spending.

The banking sector has contended that various factors, including the cost of funds and credit risk assessments, influence their lending rates.

However, CBK is keen on enhancing compliance, and it has initiated on-site inspections of five major lenders and warned of penalties for non-compliance.

Amendments to the Banking Act now allow for fines of up to Sh20 million or three times the value of any undue benefits accrued due to a bank's failure to comply.

CBK says it is determined to ensure that the benefits of its monetary policy measures are effectively transmitted to borrowers, reinforcing the banking sector's role in supporting economic growth.