Banks have widened their profit margins from lending by keeping their interest rates high despite the Central Bank of Kenya (CBK) nudging them to significantly reduce the cost of loans.
The difference between the commercial bank average lending rates and the regulator’s Central Bank Rate (CBR) has grown in recent months to hit a 31-month high of 5.15 percent in October.
The average lending rate in the month rose to 17.15 percent against the CBR rate of 12 percent.
The lending rate rose from 16.84 percent in July to 16.91 percent in September and 17.15 percent in October despite the CBR moving in the opposite direction from 13 percent to 12 percent.
The regulator cut its benchmark rate further by 0.75 percent to 11.25 percent last week as a new incentive for banks to lower their interest rates.
CBK Governor Kamau Thugge last week lamented the high commercial bank lending rates despite the apex bank signalling lower borrowing costs in the economy through successive reduction of the CBR.
“When central bank raised the policy rate, the banks were very quick to raise their lending rates. All we are asking for is for banks to be fair and act in the same way by reducing interest rates as soon as possible,” Dr Thugge said.
Kenyan banks’ pre-tax profits increased by Sh25.7 billion or 12.9 percent in the 10 months ended October 2024 to Sh225.3 billion from Sh199.6 billion in the same period last year.
Dr Thugge met with the chief executive officers of commercial banks a fortnight ago where he emphasised the importance of lowering bank lending rates.
Commercial banks argued that interest rates on loans had remained high on account of a higher funding base resulting from competition for deposits between lenders and the government, which sells short- and long-term debt securities.
Banks have cited the high cost of funds –interest paid to savers including fixed deposit account holders— as a structural hurdle to a faster drop in interest rates.
“In 2023 and early 2024, the CBK implemented successive policy rate hikes to tame persistent domestic inflationary pressure. These interest rate adjustments significantly increased short term/money market interest rates and extended to Treasury bills,” the Kenya Bankers Association (KBA) –the banking sector lobby – said in a note last week.
“The rise in T-bill rates drove up borrowing costs amidst an elevated non-performing loans ratio on private sector loans constrained extension of credit.”
Rates on T-bills have, however, been dropping rapidly in recent weeks, with the return on the 91 and 182-day securities falling below 11 percent in last week’s auction.
The average deposit rate meanwhile has been volatile, falling and rising over the months to settle in October at 11.85 percent –the peak for the year.
The CBK stepped up interest rate increases in June last year, moving the benchmark rate from 9.5 to 10.5 percent to 13 percent in February 2024.
Commercial bank average lending rates first responded to the CBK’s signalling by rising from 13.31 percent to 15.88 percent over the same period.
The bank rates have, however, continued to rise despite the CBK starting the reversal of benchmark interest rate hikes in August. Sticky commercial bank interest rates imply that banks have locked in higher profit margins from lending.
The CBK says keeping interest rates high will hurt economic activity since a large part of spending and investment is funded by credit, mostly from commercial banks.
Private sector credit growth fell to zero in October as high interest rates on commercial bank loans and the tightening of credit standards over rising impairment inhibited the demand for loans by businesses and households.
“It’s in the interest of banks to lower their lending rates. If they continue this path, it’s no win for anyone and the economy will not be able to perform,” Dr Thugge said.
“If they lower rates and stimulate economic activity, it’s a win-win for everybody as the banks will make more profits and the economy would become more active.”
Growth of bank lending to the private sector hit a 22-year low of 0.4 percent in September before dropping to zero in October.
Commercial banks have prioritised investments in less risky assets, including government securities, to remain profitable, offsetting the dip in lending to the private sector and asset quality deterioration.
The industry’s gross non-performing loans ratio eased marginally to 16.5 percent in October 2024 from 16.7 percent in August.
