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Banks urge ninth straight cut in benchmark cost of loans
The Monetary Policy Committee has cut the CBR in eight successive meetings, with the latest chop on October 7, when the rate was lowered to 9.25 percent from 9.50 percent.
Commercial banks have urged a further cut in the indicative lending rate of the Central Bank of Kenya (CBK), to help boost the pace of lending to the private sector and reduce loan defaults.
Through the Kenya Bankers Association (KBA), the lenders want the CBK Monetary Policy Committee (MPC) meeting set for Monday to cut the Central Bank Rate (CBR) from the current 9.25 percent.
The MPC has cut the CBR in eight successive meetings, with the latest chop coming on October 7, when the rate was lowered to 9.25 percent from 9.50 percent.
KBA says there is scope for a further cut in the benchmark rate to boost private sector lending and further stimulate economic growth in an environment where inflation has remained within the targeted range of between 2.5 percent and 7.5 percent, and the foreign exchange rate is largely stable.
“We view that there is scope for a further cut in the CBR to bolster private sector credit growth and stimulate economic growth. This move is expected to augment previous cuts in the CBR, signal reductions in funding costs for banks, and encourage further lending rate reductions for enhanced credit growth,” said KBA in a pre-MPC research note.
Kenya’s headline inflation was 4.5 percent in November compared with 4.6 percent in October, while the shilling has remained largely stable, exchanging at under 130 to the dollar.
The CBR had hit a 12-year high of 13 percent in February last year, where it lasted up to August of the same year, before CBK started cutting it as inflation eased and the Kenyan shilling stabilised against the dollar.
KBA hopes a further cut in CBR would make loans more affordable and attract more private sector borrowers.
The pace of private sector credit stood at 5.5 percent in September, compared to 3.3 percent in August and negative 2.9 percent in January 2025.
KBA’s push comes at a time when the banking industry is transitioning from the risk-based loan pricing model to the Kenya Shilling Overnight Interbank Average (Kesonia)—a benchmark rate that reflects the average interest rate at which banks lend and borrow unsecured overnight funds in local currency.
The new model uses the interbank rate as the common reference rate for determining lending rates to all customers.
Banks are allowed to load a premium (K) on the reference rate, now referred to Kesonia.
The total lending rate is now calculated as Kesonia + Premium (“K”), where the premium reflects the borrower's risk profile, bank costs, and shareholder returns.
CBK Governor Kamau Thugge said in September the switch to Kesonia means banks must end “excuses” and cut rates even as lenders decry a sustained higher non-performing loans (NPLs) ratio.
According to KBA, the monetary policy transmission has been strengthened with Kesonia becoming more stable and aligned with the CBR.
However, banks still have concerns around asset quality, despite the NPL ratio easing to 17.1 percent in September from 17.6 percent in June 2025.
“Concerns of elevated non-performing loans in the market continue to discourage stronger lending as banks remain cautious in lending to avert increasing loan loss provisions,” said KBA.
