Commercial banks have continued to squeeze their customers for higher margins after cutting their lending rates at a slower pace compared to the returns they offer for deposits.
The industry’s average lending margin —which measures the difference between average loan and deposit rates— currently stands at 7.48 percent, up from 5.74 percent in the second half of 2024 when interest rates were at their peak.
The average lending rate stood at 14.48 percent in January 2026, and the deposit rate at 7.0 percent.
Lending rates peaked at 17.22 percent in November 2024, while deposit rates reached a high of 11.48 percent in June 2024.
This means banks have reduced their lending rates by 2.74 percentage points since 2024, while deposit rates have gone down 4.5 percentage points.
Lowering lending rates has been the focus of the Central Bank of Kenya’s recent monetary policy actions, with an aim of improving growth of credit to the private sector.
The CBK’s monetary policy committee has made 10 consecutive cuts to the Central Bank Rate (CBR), bringing the signal rate to the current 8.75 percent from 13 percent in August 2024. The MPC made the most recent cut of 0.25 percentage points on Tuesday.
At the same time, the rate cuts have lowered the cost of financing for banks. Faced with reduced competition from other asset classes such as Treasury bills, whose rates have halved to below eight percent, banks have been able to cut returns paid to customers aggressively.
The CBK is now piling pressure on banks to lower loan rates at a faster pace in line with their reduced cost of funding, especially now that they have a new risk based loan pricing framework that is using the CBR as a key benchmark.
“We do see a lag in commercial banks reducing their lending rates, even after the policy rate has gone down 4.25 percentage points, including the Tuesday decision. The differential between the lending and deposit rates has continued to expand, and it's for this reason that we think the new risk based model will address this divergence,” said CBK Governor Kamau Thugge in a post-MPC briefing on Wednesday.
The revised risk based pricing model mandates banks to use either the Kenya shilling overnight interbank rate (Kesonia) or the CBR as the pricing benchmarks for loans, before adding a premium to cater for costs and profit.
Kesonia is also pegged to the CBR, within a corridor of plus or minus 0.5 percentage points, helping align the two rates for predictability of lending rates and effective transmission of monetary policy.
Commercial banks shifted new facilities to the new pricing framework starting December 1, 2025, while existing loans will all be migrated fully at the end of this month.
Each bank was previously using its own base rate under the older risk based framework, with customers identifying the opacity of this arrangement as one of the causes for expensive credit.
If the new framework succeeds in reducing the lending margin, it will have an impact on banks’ earnings through reduced net interest income.
In the nine months to September 2025, the top eight commercial banks saw their lending margins widen by Sh24.2 billion, highlighting the gains from lowering deposit rates faster than loan rates.
The margins for the lenders, including KCB Bank Kenya and Equity Bank Kenya, rose to Sh149.7 billion in the period compared to Sh125.5 billion a year earlier.
Interest income paid to depositors meanwhile fell 25.2 percent or by Sh42.7 billion to Sh126.7 billion in the eight banks, despite an increase of Sh152.8 billion in deposits to Sh4 trillion.
