Top banks are scrambling to cut lending rates days after the Central Bank of Kenya (CBK) warned of daily fines as a punishment for failure to lower the cost of loans for individuals and businesses.
Equity Bank of Kenya, KCB Bank Kenya and Co-operative Bank of Kenya have publicly announced cuts on their lending rates by between one and three percentage points, signalling a thawing of the standoff between them and the regulator.
The move comes after CBK Governor Kamau Thugge’s team stepped up surveillance on banks, warning of penalties for those not reducing lending rates in line with their risk-based credit pricing models and falling central bank rate (CBR).
The three lenders had a combined loan book of Sh1.531 trillion in the Kenyan market by the end of September last year or an equivalent of 37.7 percent of Sh4.064 trillion loan book of the local units of all banks in the country.
The CBK has cut the benchmark rate or CBR by a cumulative 2.25 percentage points since August last year to 10.75 percent.
However, banks kept their lending rates little changed during the period, triggering action from the banking watchdog.
Dr Thugge reckoned that banks had declined to react to policy changes to stimulate the economy.
This prompted the regulator to invoke for the first time a law that allows punishment of banks for failure to comply with regulatory actions.
The CBK’s threat came on a day it cut the CBR by 50 basis points and slashed the cash reserve ratio by one percentage point to 3.25 percent.
It wants banks to step up lending to boost demand for corporate Kenya.
The private sector credit suffered a contraction of 1.4 percent in December, marking a low last witnessed in 2002.
The country’s ideal credit growth is between 12 and 15 percent.
Equity Bank Kenya on Wednesday announced a three-percentage point reduction in interest rates on all new and existing shilling-denominated loans starting February 13.
The cut has taken the Equity Bank reference rate (EBRR) to 14.39 percent from 17.39 percent plus a margin that is dependent on each borrower’s risk profile. Equity had capped the margin at a maximum of 8.5 percent per annum.
“We understand the financial pressures facing Kenyans today, and we’re committed to doing our part to ease that burden. This rate cut is about more than just lower interest rates; it’s about opening doors for Kenyans to invest in their businesses, support their families, and their livelihoods,” said Moses Nyabanda, managing director at Equity Bank Kenya.
Equity’s move came a day after Co-op Bank and KCB Kenya announced two percentage points and one-percentage point cuts in their lending rates, respectively.
Co-op Bank was the first tier I lender to publicly announce a cut in its base lending rate, taking the figure to 14.5 percent from 16.5 percent. The loans are priced at the base rate plus a margin of up to four percent per year based on each customer’s credit profile.
“The reduction in lending rates is intended to stimulate credit growth to key sectors of the economy, notably the micro, small and medium-sized enterprises that are a critical engine to drive and sustain economic growth,” said Gideon Muriuki, the managing director at Co-op Bank.
KCB, which slashed its base rate to 14.6 percent from 16.6 percent, said the cut was applicable to all shilling-denominated loans but excludes those on fixed rate.
Dr Thugge had summoned banks several times last year to push for lower lending rates that had hit an eight-year high average of 17.22 percent last November, suppressing private sector credit growth to a 1.4 percent contraction in December last year.
More banks are expected to bring down their lending rates to avoid being hit with penalties and public resentment in an environment where inflation is below the mid-point of the targeted band of 2.5 percent and 7.5 percent and the shilling remains relatively stable against the dollar, having gained by close to a fifth last year.
The law allows the CBK to fine banks Sh20 million or three times the monetary gain on failure to follow regulatory action.
Lenders can also be slapped with an additional daily penalty of up to Sh100,000 for every case while the executives are liable to a Sh1 million fine.
Borrowers are plagued with costly loans and demand for credit contracted 1.4 percent in December last year against the ideal growth pace of 12 to 15 percent that is needed to support economic development.
Among the large banks, Standard Chartered Bank Kenya had closed December with average lending rates of 15.28 percent followed by Stanbic (15.36 percent), Equity (16.07 percent) and Diamond Trust Bank of Kenya (16.79 percent).
The average lending rate of KCB Kenya was 16.86 percent, Cooperative Bank of Kenya (16.9 percent), I&M (17.6 percent), NCBA (18.04 percent) and Absa (18.95 percent).
