The average lending rate by commercial banks rose marginally in August despite a cut on the indicative rate by the Central Bank of Kenya (CBK), denying borrowers the much-anticipated relief.
Average overall interest rates for all 38 licensed commercial banks edged higher by 0.1 percent in August to hit 16.78 percent from 16.67 percent in July according to data compiled by the CBK.
Only nine of the 38 lenders marked a slight reduction in their overall rates including Kingdom Bank, Ecobank Kenya, Guardian Bank, Bank of India, Habib Bank, KCB Bank Kenya, Guaranty Trust, ABC, and NCBA.
Overall interest rates by all other banks rose slightly except for Premier Bank Kenya whose borrowing costs remained unchanged at a mean rate of nine percent.
Samuel Tiriongo the Head of Research at the Kenya Bankers Association (KBA) said the marginal rise in borrowing costs in August reflects the slow transmission of interest rate cuts by the CBK in the economy.
“Definitely, it takes time for policy rate changes to be effected/transmitted through the market. We will see the effects of rate cuts going forward. More so with an anticipated rate cut next week,” he noted on Tuesday.
The CBK lowered its benchmark lending rate by 0.25 percent on August 6,2024 to 12.75 percent from 13 percent previously, noting a scope for the gradual easing of monetary policy amid a fall in overall inflation and continued exchange rate stability.
CBK holds its next policy rate-setting meeting on Tuesday next week where it is widely expected to lower interest rates again on further stability to consumer costs and the Kenya Shilling.
Commercial banks expect a greater cut to the benchmark lending rate by at least 0.5 percent which they assess as adequate to nudge borrowing costs lower.
“Any movement that is below 50 basis points (0.5 percent) may just be a signal to the market that we are at a stage where it shouldn’t expect rates to move higher. In the next monetary policy committee meeting, we are expecting at least a 50-basis points movement and that would be clear to the market and would be transmitted to borrowers and consumers,” KBA acting chief executive officer Raimond Molenje said in a prior interview last week.
A decision by the US Federal Reserve which cut its benchmark by 0.5 percent on September 18 is expected to galvanise CBK’s quest to lower domestic interest rates.
Prior, CBK was forced to raise local interest rates to comparatively match those in advanced economies in a bid to incentivise foreign exchange inflows into the economy to steady the Kenya shilling.
Global central banks had on their part raised interest rates as a remedy to runaway inflation which followed the reopening of world economies after the pandemic- an environment characterised by supply-chain constraints and renewed global tensions including the Russia-Ukraine war.
The scope for further interest rate cuts by the CBK raises the prospect of lower borrowing costs for consumers in the coming months.
Lower borrowing costs are expected to renew demand for credit by consumers from commercial banks while lowering the industry’s ratio of non-performing loans (NPLs) from the current near two-decade high.
As of August, Premier Bank Kenya had the lowest overall interest rate on loan facilities at nine percent while Middle East Bank Kenya had the highest overall lending rate at 21.36 percent.
Sidian Bank Limited meanwhile marked the largest jump in overall lending costs during the month at 0.62 percent to 19.82 percent from 19.2 percent previously.
Only Equity Bank Kenya revealed a trim to its reference rate following CBK’s benchmark interest rate cut.
The lender reduced the Equity Bank’s Reference Rate (EBRR) from 18.24 percent to 17.83 percent on September 9 with the new rate applying to all Kenya shilling-denominated credit facilities.
The lender's charge on loans to its riskiest customers stands at 26.33 percent from 26.74 percent, previously. All 38 commercial banks are now clear to implement risk-based pricing on loans, assigning varying interest rates to different customers based on their respective risk profiles.
