Commercial banks increased interest rates for the third straight month to an average of 17.22 percent in November, despite cutting the returns on customers’ deposits in an environment of falling base lending rates.
The latest Central Bank of Kenya (CBK) data shows that the latest average lending rates, which were last seen eight years ago when they averaged 17.66 percent in August 2016, marked a rise from 17.15 percent in October.
The rise in lending rates comes despite the CBK having cut the central bank rate (CBR) thrice—between August 6 and December 5— by a cumulative 1.75 percentage points and returns on some Treasury bills falling steadily to below 10 percent last month.
The three cuts have taken the CBR down to 11.25 from the 22-year high of 13 percent that lasted between February 6 and August 5, 2024.
However, banks have defied CBK calls to cut the lending rates, arguing that they are still stuck with deposits they tapped at an expensive rate when the CBR and returns on government paper were rising.
The persisting rise in lending rates is despite banks cutting the deposit rate for two straight months to 10.41 percent in November from 11.01 percent the previous month and 11.24 percent in September.
The rising interest rates on loans against falling deposit rates points to a widening margin for banks even as they drag their feet on cutting the cost of loans. CBK started cutting CBR early August but many banks have been slow to pass the benefits to customers.
KCB Group chief executive Paul Russo says while the CBR cuts are a welcome move to stimulate economic activity in the country, customers will have to wait for up to six months to feel the relief.
“Banks face a lag in implementing the rate cuts due to locked-in, higher-cost deposits. As these deposits mature and are replaced with lower-cost options, banks will have greater flexibility to reduce lending rates further. It takes about three to six months to reflect the adjustments. Effectively, therefore, the impact of the lower CBR in 2024 will be felt by the first quarter of 2025,” said Mr Russo.
Latest CBK data shows that 14 banks or more than a third of commercial banks’ weighted average lending rates were above the sector’s average, with large banks such as I&M Bank and NCBA Bank Kenya making the list with averages of 18.31 percent and 18.89 percent respectively.
Equity Bank Kenya closed November with an average of 16.07 percent, while that of Standard Chartered Bank Kenya, Stanbic Bank Kenya and KCB Bank Kenya averaged 16.64 percent, 16.74 percent and 16.84 percent respectively.
The weighted average of Diamond Trust Bank Kenya was at 16.79 percent during the period, while Co-operative Bank of Kenya closed at 16.89 percent.
Premier Bank Kenya’s rate was at nine percent, making it the cheapest lender in the CBK's ranking, which lists the top five costliest lenders on average lending rates as Middle East Bank Kenya (21.17 percent), Commercial International Bank Kenya (20.37 percent), HFC Bank (20.34 percent), Credit Bank (20.28 percent) and Sidian Bank (19.89 percent).
