The difference between what Kenyan banks charge for loans and pay on deposits has hit its highest level in nine years at 7.44 percentage points, leaving borrowers and savers both worse off despite falling policy rates.
Central Bank of Kenya (CBK) data show that lending rates have eased by just 1.77 percentage points between August last year and September while deposit rates have fallen by 3.65 percentage points in the same period.
The cuts in deposit rates are in tandem with reduction on the benchmark CBK rate.
The uneven adjustment—which placed average interest rate at 15.07 percent in September and deposit rate at 7.63 percent—has pushed the spread to 7.44 percentage points.
This is the highest spread since August 2016, when the gap reached 11.29 percent just before Kenya introduced lending caps 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.
Concerns about the mismatch between lending rates and Central Bank Rate (CBR) had prompted CBK Governor Kamau Thugge to intervene more directly through moral suasion and threat of daily fines to improve rate transmission.
In addition, CBK has reviewed the risk-based pricing framework, establishing a common base lending rate for all banks based on the overnight-interbank lending rate, renamed the Kenya Shilling Overnight Interbank Average (Kesonia).
Kesonia is closely tied to the CBR under the interest-rate corridor framework, where overnight lending rates for borrowing between banks are held at no more or less than 0.75 percent of the benchmark.
The total cost of credit to a borrower equals Kesonia plus a premium denoted as K, which is determined according to the risk profile of each customer, but also factors in bank margins plus expected returns to shareholders.
Dr Thugge believes Kesonia has ended ‘all excuses’ for banks not to lower their lending rates, adding that the interest rates on loans should now mirror the prevailing policy rate.
“There should be no excuse by banks for whatever reason [not to cut interest rates]. There have been quite a number of excuses. This time, there won’t be an excuse. Once we lower CBR, banks should also lower their interest rates,” Dr Thugge said.
The CBR had hit a 12-year high of of 13 percent in February last year where it lasted up to August of the same year before CBK started cutting it as inflation eased and the Kenya shilling stabilised against the dollar.
The CBR is now at 9.25 percent, being a 3.75 percentage points cut that has come from eight cuts since August last year.
This means the reduction in the deposit rate to an average of 7.63 percent compared with 11.28 percent at the start of August last year has nearly matched the CBR. However, over the same period, the cuts on lending rates have barely matched the cumulative cuts in the CBR.
Some banks have argued that they have been reluctant to cut lending rates significantly because they still face elevated credit risks in sectors like manufacturing, real estate and small and medium-sized enterprises.
The sharp drop in deposit rates reflects both lower competition for funds and subdued private-sector credit demand. The result has been a squeeze on savers, who are now earning the lowest returns on deposits in nearly a decade, while borrowers continue to face double-digit loan costs.
The last time the interest rate spread was this wide was in August 2016, when lending rates averaged 17.71 percent and deposit rates just 6.42 percent — a gap of 11.29 points.
That environment triggered public outcry and eventually led Parliament to enact the Banking (Amendment) Act of 2016, which capped lending rates at four percentage points above the CBR and set a floor for deposit rates. The interest rate caps were repealed in 2019 after concerns they had curtailed credit access, especially to SMEs.
The return of a large spread has seen CBK call out banks for not passing the benefits of a lower CBR to customers. This points to a long-standing issue of weak monetary transmission which has seen the regulator unveil a new loan pricing formula.
The widening spread is translating into improved profitability for banks. A faster drop in the cost of funds compared with the price of loans has seen banks maintain a growth in profit amid a soft economy.
CBK data shows Kenyan banks pre-tax profit for seven months to July grew by 8.75 percent to Sh177.7 billion from Sh163.4 billion in a similar period last year.
Equity Group, which is the only one that has so far published nine-month earnings shows net profit grew 32.6 percent to Sh52.12 billion in the period, mainly supported by Kenyan operations where there was a 51.2 percent rise in net earnings to Sh31.09 billion.
The persistence of high borrowing costs threatens to undermine the CBK’s efforts to boost private-sector credit, which had posted negative growth between November last year and March this year before recovering slightly to close September at a growth of five percent.
The declining deposit poses a challenge for savers given that inflation has been rising, hitting 4.6 percent in September compared with three percent at the start of the year and 2.7 percent in September last year.
