Commercial banks in Kenya have started alerting borrowers unlike in the past when they could take up to six month to lower interest rates that they will adjust their lending rates downwards from March 1, 2025.
So far, M-Oriental Bank limited was the first bank to advise their customers about the new development. In a paid advertisement in a print daily newspaper, the bank said from March 1, 2025 they would revise its interest rates downwards.
According to the bank, it will revise its interest rate from 16.5 per cent to 16 per cent. The 50 basis point reduction is expected to enable their customers to continue doing business with them.
“We shall continue to monitor the market and advise accordingly in case of any further changes,” M-Oriental said in a statement. In other banks, few individuals reported that they have been sent Short Message Service (SMS) advising them of the impending cut as at March.
However, what is shocking about them is that no bank wants to reduce the interest rate instantly the way MPC (Monetary Policy Committee) also does.
According to Moses Njuguna, financial analyst with Nabo Capital, under the Banking amendment Act any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates, will be penalized in accordance with the law.
Njuguna says in the past commercial banks in Kenya have been taking a long time to reduce their interest rates in response to the Central Bank of Kenya’s (CBK) rate cuts. The drop in interest rates is expected to encourage consumers to take out loans for investment and consumption.
In order to transfer the benefits on to its lenders, the Kenya Bankers Association (KBA) has called for additional cuts. With low inflation and a steady shilling, the apex bank lowered the Central Bank benchmark lending rate to stimulate the economy, resulting in 23 of the 38 commercial banks in the market lowering their lending rates between November and December, according to the most recent statistics from CBK.
The ratio of gross non-performing loans (NPLs) to gross loans last year stood at 16.5 per cent in October 2024 compared to 16.7 per cent in August, and is estimated to have averaged around 16.5 per cent in December.
Overall lending rates however went down to 16.89 per cent in December from 17.22 per cent in December, with all three tiers well represented in the rate cuts, with banks also giving depositors a slight gain on deposits as the average rate went up to 10.45 per cent, from 10.41 per cent.
In December, the MPC reduced the benchmark rate to a 12-month low of 11.25 per cent from 12 per cent.
“The MPC, therefore, urges the banks to take necessary steps to lower their lending rates in order to stimulate credit to the private sector and thereby stimulate more economic activity,” CBK Governor Kamau Thugge said.
