Bank lending margins have narrowed further as deposit rates catch up to average lending rates, implying steeper costs by lenders in mobilising deposits.
According to data from the Central Bank of Kenya (CBK), the bank lending margins fell to 5.05 percent in October last year, marking the thinnest spread since the beginning of 2023.
The October lending margins compare to a wider spread of 5.44 and 5.34 percent in August and September respectively.
Lending margins closed in October as the average deposit rate -the return paid out to term depositors in banks-- rose faster than the mean lending rate to hit 9.11 percent from 8.64 percent in September.
Over the same period, the average commercial lending rate only rose slightly to 14.16 percent from 13.98 percent a month earlier.
Commercial banks have been under pressure in recent months to attract term deposits from customers amid competition from other asset classes including unit trusts, Treasury Bills and bonds.
Over recent weeks, for instance, unit trusts have raised their annual returns to keep up with elevated rates on government treasuries and bank fixed deposits as they look to protect their ability to attract new investment flows.
The return for shilling-denominated money market funds ranged between 11.6 percent and 15.96 percent in mid-December compared to returns of between eight and 9.5 percent a year ago.
Returns on all Treasury bills have meanwhile crossed the 16 percent mark as investors continue to demand a premium return on government securities.
Commercial banks usually offer a premium to term depositors while deploying proceeds from the fixed deposit accounts for on-lending activities.
Recently, commercial banks have disclosed increased interest payouts on fixed deposit accounts as they take the fight to other asset classes.
Stanbic Bank Kenya is, for instance, offering depositors returns of up to 14 percent on savings.
The move is targeted at individuals, chamas, small and medium enterprises and corporates with returns being calculated at the end of each day and paid out monthly.
Under the same deal, Stanbic Bank is offering an additional one percent if no withdrawals on savings are done over a 12-month period.
On its part, Absa Bank Kenya increased the interest rate on deposits in the Absa Digital savings account to 10 percent from nine percent effective from December 12, through to March 2024. The bank said the move was aimed at fostering a savings culture among Kenyans while maximizing returns for savers.
