Banks have improved their profit margins from lending by cutting the return paid out to term depositors faster than they have trimmed interest rates on loans to borrowers.
Data from the Central Bank of Kenya (CBK) shows that the banking industry’s lending margin grew to 7.17 percent in July from 5.56 percent at the same time last year, before the start of the gradual decline in domestic interest rates.
Lending margins are determined by subtracting the average deposit rate from the mean cost of loans.
Banks have cut the deposit rate faster than they have lending rates, lowering their interest-related costs while widening the return made from issuing loans to borrowers.
The evolution of interest rates has been a win for lenders who have not only cut their interest expenses but also improved their interest income by keeping borrowing costs relatively higher.
Both depositors and borrowers have been on the losing end as returns on fixed deposit accounts fall while payments on loans have remained higher, bucking the trend of falling domestic interest rates.
The deposit rate has fallen by 3.41 percentage points after peaking at 11.48 percent in June last year, while the lending rate has fallen by just 1.98 percentage points from a peak of 17.22 percent in November 2024.
“Commercial banks' average lending and deposit rates decreased in the year to July 2025 in tandem with the easing of monetary policy," the Treasury says in its assessment of domestic interest rates.
"The average lending rate decreased to 15.2 percent in July 2025 from 16.8 percent in July 2024, while the average deposit rate also decreased to 8.1 percent from 11.3 percent over the same period. Consequently, the average interest rate spread increased to 7.2 percent in July 2025 from 5.6 percent in July 2024.”
The CBK has reduced its benchmark policy rate from a high of 13 percent in August 2024 to 9.5 percent in August 2025.
Short-term interest rates have declined in tandem with the easing of monetary policy.
The interbank rate declined to 9.5 percent in August 2025 compared to 13 percent a year earlier.
The 91-day Treasury bill rate declined to 8.0 percent last month from 15.9 percent at the same time last year.
Similarly, the 182-day Treasury bill rate has declined from 16.7 percent to 8.1 percent while the 364-day paper has declined to 9.6 percent from 16.9 percent over the same period.
Last year, commercial banks were forced to raise their deposit rates to attract customer deposits as high yields on government paper presented stiff competition for customer funds.
Banks sought the intervention of the CBK last year as they warned of heightened competition with the government for customer funds, with Dhow CSD --the improved over-the-counter platform—allowing clients to directly purchase Treasury bills and bonds at primary auctions.
“Banks respondents indicated that there was a need for intervention by the government to manage disintermediation of banks as fixed-term deposit customers switch to the purchase of T-bills and T-bonds and thus increasing the cost of deposits, heightening aggressive competition for wholesale deposits between banks and crowding out lending to the private sector,” banks told the CBK in a survey in October 2024.
The decline in returns from government paper has incentivised banks to lower the return to term depositors without risking losing the funds.
Commercial banks deploy term deposits from customers to fund their loan book, making the interest payments to the fixed-deposit account holders critical in determining lenders’ margins.
The wider lending margins for banks come amidst concerns about unchanged commercial bank borrowing costs, which have remained relatively higher against sharp cuts to other domestic rates.
The concerns have prompted the CBK to review the risk-based pricing framework, establishing a common base lending rate for all banks based on the overnight-interbank lending rate, which has been renamed the Kenya Shilling Overnight Interbank Average (Kesonia).
Kesonia is closely tied to the Central Bank Rate (CBR) under the interest-rate corridor framework, where overnight lending rates for borrowing between banks are held at no more or less than 0.75 percent of the benchmark.
The total cost of credit to a borrower equals Kesonia plus a premium denoted as K, which is determined according to the risk profile of each customer, but also factors in bank lending margins plus expected returns to shareholders.
The established industry benchmark is expected to bring borrowers' costs closer to the CBR, reducing loan costs during periods of a loose policy rate environment and raising them when the policy rate is increased.
Last week, the CBK said it had ended all excuses for banks not to lower their lending rates, adding that the interest rates on loans should now mirror the prevailing policy rate.
“There should be no excuse by banks for whatever reason (not to cut interest rates). There have been quite a number of excuses. This time, there won’t be an excuse. Once we lower CBR, banks should also lower their interest rates,” CBK Governor Kamau Thugge said.
