KCB Group chief executive Paul Russo had just one rallying call to his team at the end of 2024: Go find cheap deposits. He wanted them to succeed at what had been one of the toughest challenges for both his team and the banking sector that year.
Fast forward to December 2025 and his team appears to have accomplished the task, largely benefiting from a favourable shift in the market.
As at the end of September, the lender’s interest expense on deposits from Kenyan operations alone fell by Sh3.52 billion or 10.8 percent to Sh29.01 billion despite deposits growing by 2.83 percent or Sh29.23 billion to Sh1.062 trillion.
Unlike in 2024, when banks had to raise deposit returns to a 26-year high of 11.48 percent to entice customers away from investing in government securities amid rising rates, the tide has now shifted.
The interest rate cuts have tilted the scales in favour of borrowers and banks, serving a blow to savers who last year enjoyed one of their best years of holding money in bank accounts.
Data for Kenyan operations of top nine banks —KCB Group, Equity Group, Co-operative Bank of Kenya, NCBA Group, DTB Group, Stanbic Bank Kenya, Absa Bank Kenya, I&M Group and Standard Chartered Bank Kenya— shows the lenders’ interest expense on deposits had reduced by a quarter or Sh43.37 billion to Sh129.41 billion in nine months ended September 2025.
The decline in interest expense was despite the stock of customer deposits rising by Sh151.87 billion or 3.66 percent to Sh4.306 trillion over the same period.
The year closes with the average deposit rate having dropped to 7.3 percent as at the end of last month —nearly matching the previous low of 7.17 percent recorded in December 2022. The falling deposit rate has cut banks’ interest expense on deposits, dealing a blow to savers.
However, the fall in deposit rate has been accompanied by a decline in the interest rates charged on loans, with the average lending rate for the sector falling to 15.07 percent at the end of last month compared with an eight-year high of 17.22 percent in a similar period last year.
The falling deposit rates and interest rate on loans has been music to the ears of borrowers but a blow to savers —a shift in the script when compared to 2024 when it was the savers enjoying higher returns and borrowers struggling with higher loan rates.
In a mid-September interview with this publication Prime Bank CEO Rajeev Pant spoke of the difficulties of balancing the needs of borrowers and savers.
“It is always a double-edged sword —if I make one happy, the other side complains. It requires a balancing act somewhere because we can’t do without either of the parties,” said Mr Pant.
‘If you are a businessman and you are borrowing you obviously want to have the lowest cost of capital. If you are a retired pensioner, you obviously want the highest rate of interest on your deposit. It is always a balance and much of this is beyond our control. It is a function of the economy and where interest rates are.”
For savers, the continued decline in deposit rate means they have to look for alternative investment classes if they are to get the same returns.
However, this may require tinkering their risk tolerance as they look for returns in places such as the Nairobi Securities Exchange where the market has for the second year running posted improved returns.
The decline in returns on deposits has been alongside a decline in what government securities —Treasury bills and Treasury bonds— have been offering investors this year compared to the last two years. For instance, returns on the short-term T-bills have declined to single digits.
The shift has come on the back of inflation remaining within the targeted range of between 2.5 percent and 7.5 percent and the shilling exchanging at under 130 units to the US dollar, allowing the Central Bank of Kenya (CBK) to cut the benchmark rate in nine consecutive sessions.
Banks have emerged as winners in this environment, with the gap between what lenders charge for loans and pay on deposits hitting its highest level in nine years at 7.6 percentage points in November this year.
CBK data shows that November’s spread is the highest since August 2016, when the gap reached 11.29 percent just before Kenya introduced caps on lending rates to tame the cost of credit.
The widening gap suggests that banks have been slow to pass on lower interest rates to borrowers, even as they moved quickly to cut what they pay depositors —a trend that reflects profit protection in the sector. However, Mr Russo says interest rates on loans could not have declined at the same pace at which deposit rates have been falling.
“The widening spread needs to be viewed through a prudential lens. Deposit rates have adjusted faster because liquidity has improved system wide. However, it has to be noted that lending rates embed longer-term risk assumptions, capital costs, and provisioning expectations among other considerations and not only cost of funds i.e. deposit rates,” said Mr Russo.
Deposit rate has dipped by 3.94 percentage points from the recent peak of 11.24 percent in September last year while interest rates have declined by 2.32 percentage points from the peak of 17.22 percent in November last year.
The decline has come on the back of CBK having cut the Central Bank Rate (CBR in nine consecutive sessions including December 9 where it slashed the rate to nine percent from 9.25 percent. At nine percent, the CBR is at the lowest level in about three years, having stood at 8.75 percent in January 2023.
Mr Russo says lending rates are “not determined by the policy rate alone” and therefore loan costs could not fall by the same margin with which the CBR declined.
“They [lending rates] reflect credit risk, borrower cash-flow visibility, sectoral stress, legacy loan repricing and general economic growth. Over the last year, while inflation has moderated, risk in parts of the real economy has remained elevated, particularly among SMEs, households, and other exposed sectors like hospitality and manufacturing,” said Mr Russo.
The CBR had hit a 12-year high of 13 percent in February last year and remained static until August of the same year before CBK started cutting it as inflation eased and the Kenya shilling stabilised against the dollar.
Russo says customers should expect more cuts in the lending rate going forward, supported by the recently introduced Kenya Shilling Overnight Interbank Average (Kesonia) rate which “closely” tracks the CBK policy rate. Kesonia is the rate at which banks lend to one another on a short-term basis.
“What we are seeing is not banks resisting monetary policy, but a cautious recalibration where risk premium is coming down slowly in comparison to funding costs. As confidence and asset quality improve, transmission will be more pronounced in the coming days," Mr Russo said.
CBK governor Kamau Thugge had to summon banks and threaten them with penalties for not lowering lending rates to stimulate borrowing in an environment of declining CBR. In September, he said the switch to Kesonia meant banks had no more “excuses” to give.
A CEOs survey conducted by CBK this month showed the majority (78.3 percent) of respondents saw a decline in interest rates charged on loans with 29.7 percent seeing declines of between two percent and three percentage points when compared with August last year when CBK started cutting the CBR.
Banks are expected to transition fully to Kesonia by the end of February next year to support further cuts. Banks say the reducing deposit rate, which is translating into lower interest expense, is going to give them further room to relax lending rates. However, the pace of cuts will depend on other factors such as the non-performing loans (NPLs) ratio.
“The pace and depth of further reductions will depend on how quickly credit risk normalizes, how legacy loans roll off, and how the macro-economic environment evolves,” said Mr Russo.
“For a bank like KCB, the priority is to ensure that any reduction in loan prices is sustainable and aligned with borrower fundamentals. If inflation remains anchored and stable, fiscal pressures ease, and asset quality improves, there is a clear pathway for lower lending rates into 2026.”
