The Central Bank of Kenya (CBK) will mete out daily fines to banks as punishment for failure to cut interest rates in the latest effort by the regulator to unlock cheaper credit for businesses.
CBK Governor Kamau Thugge said on Wednesday the regulator has started physical inspections of banks to expose and punish those that are reluctant to reduce lending rates in line with cuts on the benchmark rate.
He spoke on a day the regulator lowered its benchmark rate by 50 basis points and reduced the cash holdings to free up billions for banks to lend to customers trying to cope with a cash crunch.
Bankers face a fine of Sh20 million or three times the monetary gain, with the regulator leaning on the punitive penalty.
Lenders will be slapped with an additional daily penalty of up to Sh100,000 for every case or implying for each loan account with the executives liable for a Sh1 million fine.
The central bank’s monetary policy committee lowered the benchmark lending rate to 10.75 percent from 11.25 percent—making it the fourth cut in a row.
It also lowered the cash reserve ratio for commercial banks to 3.25 percent from 4.25 percent in the first cut since the 2020 Covid-19 economic hardships, freeing up at least an extra Sh73.7 billion for banks to lend to customers.
Borrowers are plagued with costly loans and demand for credit contracted 1.4 percent in December last year against the ideal growth of 12 to 15 percent needed to support economic development.
The CBK reckons that banks have declined to react to policy changes to stimulate the economy, pushing the regulator to invoke for the first time a law that allows the punishment of banks for failure to comply with regulatory actions.
Between August 6 and December 5 last year, the CBK cut the benchmark rate or 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 and reckoned they had locked in deposits that they use for loans at higher rates.
“To ensure that banks are implementing the risk-based credit pricing model (RBCPM), CBK has embarked on an on-site inspection of banks to ascertain that they are reducing their interest rates in line with the RBCPM,” Dr Thugge said on Wednesday.
“Under the amendments to the Banking Act recently enacted by Parliament, any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates will be penalised in accordance with the law.”
The CBK will hinge its action on section 55 of the Act, which prescribes the penalties.
“The penalties prescribed shall not exceed twenty million shillings in the case of an institution or three times the gross amount of the monetary gain made, or … one million shillings in the case of a natural person,” says the Act.
“The central bank may, in regulations, prescribe additional penalties not exceeding one hundred thousand shillings in each case for each day or part thereof during which such failure or refusal continues.”
In December, banks made the first cut on lending rates with an average reduction of 0.33 percentage points since August -- a small share of the 1.75 percentage points cut on the benchmark lending rates.
Just four lenders— Citibank NA Kenya, Standard Chartered Bank of Kenya, Victoria Commercial Bank and Stanbic Bank Kenya— cut their rates by at least 1.75 percentage points.
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.
Private sector credit dipped to a new 22-year low in December following the contraction that the CBK blamed on costly loans.
“The committee observed that the CBR has been lowered substantially since the MPC meeting of August 2024, yet lending rates have only declined marginally,” said Dr Thugge.
“With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector, and support economic activity.”
The measures include lowering the cash reserve ratio (CRR) to 3.25 percent.
Commercial banks are required to keep a share of their deposits at the central bank as reserves for emergencies.
“The reduction in the CRR will release additional liquidity to banks. This is expected to lower the cost of funds and lending rates, and support growth of credit to the private sector,” said Dr Thugge.
The banks last week held Sh16.7 billion in excess reserves whose release would add to the pool of funds available for lending, freeing up an extra Sh73.7 billion.
Cheap credit could also help banks easily manage the rising stock of non-performing loans that 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.
The industry’s non-performing loans (NPLs) ratio has shown signs of easing, dropping to 16.4 percent in December 2024 from 16.5 percent in October and 16.7 percent in September.
Decreases in NPLs have been noted in the manufacturing, trade, building and construction, real estate, energy and water sectors.
