Kenya's top eight commercial banks saw their lending margins widen by Sh24.2 billion in the nine months to September, as they cut returns to depositors at a faster pace compared to reduction in the cost of loans.
The lending margins of the banks, including KCB Bank Kenya and Equity Bank Kenya, rose to Sh149.7 billion in the review period compared to Sh125.5 billion a year earlier, according to analysis of the results published so far.
Depositors saw their interest income drop by Sh42.7 billion or 25.2 percent to Sh126.7 billion despite increasing their savings by Sh152.8 billion to Sh4 trillion.
The interest income from loans meanwhile fell at a slower pace of 6.3 percent or Sh18.5 billion to Sh276.5 billion, allowing the banks to expand their lending margins in absolute and percentage terms.
Their loans in the review period rose by Sh159.8 billion to Sh2.88 trillion.
The growth in net interest income shows that depositors have been squeezed more while borrowers have not gained a proportionate benefit from the central bank's policy to lower interest rates in the economy.
Faced with reduced competition from other asset classes such as short-term Treasury bills –whose returns have halved to below eight percent— banks have been able to cut returns paid to depositors more aggressively.
“Despite reducing interest rates for customers, the yields have improved significantly because of the cost of funds. So, when the government decided to lower its borrowing rates from 17 percent to currently in the regions of 10 percent the cost of funds went down and net interest margin has driven Kenya,” said Equity Group chief executive James Mwangi during the bank's investor briefing at the end of October.
“As rates came down, we passed that to the customers and reduced loans by 300 basis points, so income has only grown by 3.0 percent. But interest expense has gone down by 21 percent, giving us a 16 percent growth in net interest margin from Sh80 billion to Sh93 billion,” he added.
Data from the Central Bank of Kenya (CBK) shows that the banking sector's average deposit rate dropped to 7.63 percent in September 2025 from 11.24 percent a year earlier.
The sector's average lending rate on the other hand declined marginally to 15.07 percent from 16.91 percent in September 2024.
The growth in lending margins has helped the large banks to report higher earnings in the nine months to September.
Equity Bank Kenya's net profit grew 51.2 percent to Sh31 billion in the review period as interest margin widened to 8.1 percent from 6.6 percent.
KCB Bank Kenya reported a 6.4 percent profit growth to Sh33.7 billion, supported by its interest margin widening to 7.1 percent from 6.5 percent.
KCB and Co-operative Bank of Kenya were the only large banks to record growth in interest income. KCB recorded a 17 percent expansion of its loan book while other banks saw their lending to the private sector shrink, signalling a difficult business environment.
“Total revenue grew by five percent supported by 12 percent growth in net interest income on the back of a drop in interest expense,” said the group’s chief executive, Paul Russo, in a note to investors.
Stanbic Bank recorded the widest drop in the cost of funds of 48 percent, which helped it absorb a 24 percent slump in interest income.
NCBA Bank Kenya recorded a 45.5 percent drop in interest expenses compared to a 16.4 percent decline in interest income. NCBA said it had been rejecting expensive deposits which saw customer savings held in its vaults drop by Sh31.4 billion.
The CBK has been pressuring banks to lower their interest rates to spur private sector lending in a bid to support economic growth.
The CBK's monetary policy-making committee has in the past nine consecutive meetings cut its base rate to 9.25 percent from 13 percent in June 2024.
Besides rate cuts, it has also reduced the cash banks are required to hold as reserves with the regulator so as to increase liquidity and increase lending to the private sector.
Banks have, however, been slow to pass the benefits of reduced cost of funds and a lighter cash requirement, drawing rebuke from the CBK which has told them to stop giving excuses and lower lending rates.
The regulator is also banking on a new loan pricing formula, which takes effect starting next month, to see banks transmit rate cuts by the monetary policy to the public in full and promptly.
Some of the hurdles, cited by banks, to cutting interest rates on loans include different base lending rates and the poor development of the risk-based pricing framework.
Commercial banks are expected to adopt a new industry loan-pricing standard dubbed the Kenya Shilling Overnight Interbank Average (Kesonia), which is hooked to the rate banks lend to each other.
Banks have used the wider interest margins to protect their profit levels, which are under threat from slow credit growth, loan defaults and a dip in forex income.
The lenders were emboldened to reject expensive deposits as they were not growing their loan books. Taking cash out of banks to invest in Treasury bills also became less attractive for cash-rich individuals and companies as the returns on the sovereign debt declined.
Slow lending has seen banks hold record cash levels, with average liquidity ratio rising to 59.8 percent at the end of August, up from 54.4 percent a year earlier.
This is the highest liquidity ratio recorded for the industry and is against a regulatory requirement of 20 percent.
The liquidity ratio –which captures the amount of cash or near-cash assets held by banks in comparison to their short term deposits– reflects how efficiently a bank is deploying customer savings to make profits.
