Commercial banks have made the first cut on lending rates since the central bank started slashing the benchmark rate in August last year, yielding to pressure from the banking regulator.
Central Bank of Kenya (CBK) data shows that average lending rates fell to 16.89 percent in December from an eight-year high of 17.22 percent recorded in November.
But the average reduction of 0.33 percentage points since August is a small share of the 1.75 percentage points cut on the benchmark rate or the central bank rate (CBR).
Between August 6 and December 5, the CBK cut the CBR thrice by 1.75 percentage points to 11.25 percent from a 22-year high of 13 percent that lasted for about seven months.
Banks continued to increase their lending rates during the period, prompting summons from CBK governor Kamau Thugge.
The lenders argued that they had locked in deposits that they use for loans at higher rates.
Just four lenders— Citibank NA Kenya, Standard Chartered Bank of Kenya, Victoria Commercial Bank and Stanbic Bank Kenya—have cut their rates by at least 1.75 percentage points.
A drop in lending rates is expected to cut the mounting loan defaults and stimulate demand for loans that will put money in consumers’ pockets and rekindle orders for goods and services in corporate Kenya.
The cut in lending rates comes ahead of next week’s rate-setting meeting by the CBK’s Monetary Policy Committee—the first this year.
Bankers’ lobby—the Kenya Bankers Association (KBA)—has called for further cuts in CBR in efforts to reverse the deceleration in private sector credit. CBK data shows 23 banks lowered their lending rates between November and December, with large cuts coming from Citibank NA Kenya (1.83 percent), Victoria Commercial Bank (1.76 percent), Stanbic Bank Kenya (1.38 percent), Standard Chartered Bank of Kenya (1.36 percent) and NCBA with 0.85 percentage points cut.
However, 14 lenders raised their rates, with that of Premier Bank going up by 3.43 percentage points followed by Middle East, 0.83 percent and Habib Bank AG Zurich, 0.14 percent.
Standard Chartered Bank is the cheapest lender among Kenya’s nine top-tier lenders. Its average lending stood at 15.28 percent in December.
It was followed by Stanbic (15.36 percent), Equity (16.07 percent), Diamond Trust Bank of Kenya (16.79 percent), KCB Kenya (16.86 percent), Cooperative Bank of Kenya (16.9 percent), I&M (17.6 percent), NCBA (18.04 percent) and Absa (18.95 percent).
KBA reckons that borrowers will enjoy the full benefit of the CBR cuts from March when costly deposits expire.
The average deposit rate has marginally dropped from 11.14 percent in August to 10.45 percent in December.
The fall in CBR was expected to trigger a fall in the cost of loans for households and firms who have struggled to service costly credit since the CBK started raising rates in June 2022 amid global economic shocks that saw inflation rise to multi-year highs.
Demand for credit contracted 1.1 percent in November compared to an increase of 3.7 percent in July—a 22-year low.
The CBK considers credit growth of 12 to 15 percent to be sufficient to support the healthy growth of the economy. The high cost of borrowing had discouraged borrowers from tapping loans in an economic setting where demand for products is sluggish, forcing firms to freeze hiring and expansion plans.
The drop in the cost of loans is expected to prompt consumers to take up funds for investments and consumption in the coming months, boosting economic activities.
“In view of these developments, and the growing need to reverse the deceleration in private sector credit, we call for a further cut in the CBR to provide additional impetus to the ongoing downward adjustments in the commercial banks’ lending rates,” said KBA in a pre-MPC note.
Cheap credit could also help banks easily manage the rising stock of non-performing loans that have surged due to expensive credit and Kenya’s soft economy.
This has given birth to a rising number of distressed borrowers whose assets, from homes to cars and furniture, are being seized by aggressive banks.
