Since August 2024 the Central Bank of Kenya (CBK), through the Monetary Policy Committee (MPC), has lowered the Central Bank Rate (CBR) three times, in an effort to ease monetary conditions.
In that period, the average lending rate has increased from 16.84% to 17.15% between August and October. As the MPC announced its recent reduction, lowering the CBR to 11.25% from 12%, commercial banks have finally made a move.
Through the Kenya Bankers Association (KBA), they have committed to reducing the rates.
Effective December 2024, banks are expected to start notifying customers about the reduction in loan rates. According to the John Gachora, KBA chairman, they have taken notice of the challenges many individuals and businesses have faced as a result of the high cost of loans.
However, to many Kenyans, commitments rarely amount to much as evidenced with the average lending rates increasing in the period of rate cuts according to data from the CBK.
Banks have always been quick to integrate changes, by increasing their lending rates, when the base lending rate is increased but vice verse, they usually drag their feet. According to Kamau Thugge, governor of the CBK, banks should play fair and reduce their rates as fast they raise them.
“When central bank raised the policy rate, the banks were very quick to raise their lending rates, all we are asking is for the banks to be fair and to act in the same way that they were quick to raise their lending rates when policy rate was increasing. They should equally reduce as soon as possible,” Thugge said.
Even though banks have heeded the call to lower rates, it will be done in stages, in response to the cost of deposits. “We will continue to progressively reduce the loan interest rates balancing against the prolonged high cost of customers’ deposits that were locked in during a period of higher interest rates,” said John Gachora.
The economy is clearly experiencing a slowdown from the rising cost of living and prolonged economic challenges. Job layoffs and business closures have become the norm in the country.
However, midst all this, the banking sector has continued to soar as demand for credit increases especially in the personal and household sector.
According to data from CBK, the sector recorded a profit before tax of Sh64.2 billion in Q3 2024 as a result of an increase in income in the same period by Sh4.3 billion.
Prior to the recent rate cut, KBA had called for it in order to provide a stronger signal to the market as well as facilitate a decline in bank interest rates.
However, the question remains, are banks willing to lose the increasing income they collect from the high rates or will they prefer the alternative, slowly reducing their rates while they await the next hike in the CBR.
As the fourth quarter comes to an end, their commitment will be put to the test. Either way, at the end of the day, Kenyans will continue to suffer, as a reduction in the lending rate is often accompanied by limited access to credit.
