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Kenyan banks are swiftly lowering lending rates following a mandate from the Central Bank of Kenya (CBK), which has warned financial institutions of daily penalties for failing to comply.
The regulator is taking strict measures against banks that have been slow to lower their rates despite multiple Central Bank rate reductions aimed at making credit more affordable for businesses. Under Kenya’s Banking Act, the CBK has the authority to levy fines of KES 20 million ($154,619) or three times the financial benefit gained by non-compliant lenders.
Banks risk additional penalties of KES 100,000 ($773) per day for each violation, while individual bank executives could face fines of up to KES 1 million ($7,730). Major financial institutions such as KCB Group, Equity Group ,Cooperative Bank, I&M, and DTB have responded by lowering interest rates by one to four percentage points. The CBK’s objective is to boost economic activity and provide relief to households and businesses facing financial strain.
With its latest rate reduction this week, Equity Bank has now lowered borrowing costs three times in the past six months. This makes it the only major financial institution to consistently adjust its lending rates in alignment with the CBK’s monetary policy changes.
“The regulator expects banks to reflect recent monetary policy adjustments in their lending rates, but they have not done so,” said a senior CBK official, who requested anonymity to speak openly. “Non-compliance will result in penalties.”
The CBK has intensified monitoring of banks through onsite inspections to ensure loan pricing aligns with their risk-based models and the declining central bank rate. Banks that have yet to comply are expected to reduce their rates to avoid financial penalties.
“We are simply asking banks to be fair and adjust their lending rates just as quickly as they did when policy and treasury rates were rising,” CBK Governor Kamau Thugge stated on December 6.
Thugge emphasized that reducing lending rates benefits banks as well, warning that maintaining high rates would be detrimental to both financial institutions and the broader economy. “If they persist on this path, it will be a lose-lose situation, and economic growth will suffer,” he stated. Between November and December 2024,
Thugge called a meeting with bank executives, pressing them to reduce borrowing costs to stimulate economic growth. However, only a few lenders, including Equity Bank, responded by lowering their rates.
Although the central bank has implemented three consecutive rate cuts, the gap between its benchmark rate and lending rates has expanded to its widest level in nearly three years, highlighting concerns over the weak transmission of monetary policy to borrowers.
The average lending rate surged to 17.22%, marking its highest level in eight years and contributing to a 1.4% decline in private sector credit growth.
Since August 2024, the Central Bank of Kenya has reduced the benchmark rate by 2.25 percentage points to 10.75%, with the most recent cut occurring on February 5, 2025.
