The Central Bank of Kenya (CBK) has implemented aggressive measures to force banks to reduce lending rates, including imposing daily fines of up to Sh100,000 per loan account in breach and penalties of up to Sh20 million or three times the monetary gain for banks that fail to comply.
The CBK has cut its benchmark rate for the fourth consecutive time to 10.75% from 11.25% and reduced the cash reserve ratio from 4.25% to 3.25%, freeing up Sh73.7 billion for lending, as private sector credit contracted by 1.4% in December against an ideal growth of 12-15%.
The policy changes come amid concerns that banks have been slow to pass on previous rate cuts to borrowers, with only four banks - Citibank NA Kenya, Standard Chartered Bank of Kenya, Victoria Commercial Bank, and Stanbic Bank Kenya - having reduced their rates by at least 1.75 percentage points since August.
CBK has begun physical inspections of banks to ensure compliance with the Risk-Based Credit Pricing Model, as high lending rates have led to increased non-performing loans, which stood at 16.4% in December 2024, though showing slight improvement from 16.7% in September.
The Central Bank of Kenya Monetary Policy Committee on Wednesday, January 5, announced it had lowered its base lending rate by 50 basis points to 10.75 % down from 11.25 %, effectively cheapening interest charged on loans.
According to the The Monetary Policy Committee chaired by Central Bank's Governor Kamau Thugge, the committee resolved to also lower the Cash Reserve Ratio by 100 basis points to 3.25% from 4.25 %, in order to further support the lowering of lending rates.
“With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector, and support economic activity,” the CBK Governor said.
CBK’s foreign exchange reserves currently stand at $9,066 million, equivalent to 4.6 months of import cover, enough to provide a buffer against any short-term shocks in the foreign exchange market.
In a statement seen by JULISHA.CO.KE, Thugge said the lowering of the lending rate aligns with the trend in major economies, which have continued to lower their lending rates.
He adds that the MPC lowered the lending rate and CRR to support economic activity whilst ensuring exchange rate stability in cognisance of the fact that the Kenyan economy decelerated in 2024.
“The MPC noted that the reduction in the CRR will release additional liquidity to banks. This is expected to lower the cost of funds and lending rates, and support growth of credit to the private sector,” read the statement in a part.
He said MPC will closely monitor the impact of its policy measures as well as developments in the global and domestic economy and will take further necessary action in line with its mandate when it meets next in April.
Meanwhile, the MPC said Kenya’s overall inflation rose marginally to 3.3% in January 2025 compared to 3.0% in December 2024, but it’s expected to remain below the midpoint of 5±2.5 percentage target range in the near term.
It said global headline inflation has moderated but the pace of decline has slowed down in major economies due to sticky core inflation.
Overall, the committee said global economic growth continues to recover and is projected to improve to 3.3% in 2025 from an estimate of 3.2 in 2024.