Kenyans with money to keep in banks saw returns drop by Sh22 billion in the year to June after top bankers cut deposit rates in the wake of pressure from the Central Bank of Kenya (CBK) to lower the cost of loans.
Regulatory data show that the nine top-tier banks, including KCB, Equity and NCBA, paid depositors Sh89.9 billion in interest returns over the first half compared to Sh111.9 billion in the same period a year earlier.
Deposits in bank vaults increased 2.8 percent to Sh4.24 trillion in the six months to June.
The drop in the cost of funds followed CBK pressure on banks to cut their lending rates and extend credit to the productive private sector, which had shelved borrowing plans due to costly credit.
The CBK its indicative rate – central bank rate (CBR) – for seven consecutive sessions to boost lending and threatened banks with penalties for being slow to cut loan costs.
This forced lenders to cut fixed deposit rates to an average of 8.37 percent in June from 11.48 percent in the same month last year.
At 8.37 percent, the returns trail those of bonds that are paying a range of 12 to 14 percent, money market funds that offered up to 13 percent and the Nairobi Securities Exchange (24.3 percent).
NCBA reduced its payout by 42.8 percent or Sh7.9 billion, helping the lender record double-digit profit growth despite a shrinkage in its core business.
“On deposits, we were managing the cost of deposit, which came down significantly; in the process, we had to let go of some costly deposits,” said John Gachora, the NCBA Group chief executive officer.
The bank’s deposits shrank by Sh33.9 billion in the period under review.
Banks rejected expensive deposits in line with reduced demand for loans and pressure from the CBK amid mounting defaults.
The falling returns from government papers also pushed banks to reject costly deposits because a lender uses customer savings to buy Treasury bills and bonds for a margin.
“The reason why we slowed in balance sheet growth is that we said we could not take deposits at just any rate; we made our borrowing possible when we reduced our deposit rates. Yes, we lost about Sh70 billion of deposits, but we said - it’s meaningful,” said James Mwangi, the Equity chief executive.
Equity’s cost of deposits fell by Sh3.3 billion, with a major shift of its savings book happening between January and June. It lost deposits worth Sh18 billion in the Kenyan market and Sh80 billion at the group level.
Cash-rich individuals and corporate entities who were benefiting from the high interest rates regime are now bound to look for new places to park their funds following the drop in rates to a two-year low.
Eager to lock in attractive yield rates, investors have flooded the bond markets, offering the government a record Sh323.4 billion in August.
However, the central bank turned down most of the offered funds, accepting only Sh95 billion as it bid to ensure a low interest rate regime.
Some of the large cash holders include insurance companies, pension fund managers, parastatals and large corporates who use their financial muscle to bargain for higher returns.
As corporate depositors seek alternative investments for their cash, banks are expected to turn to private sector lending as an opportunity to make returns from lending to the government fades.
“A lot of the money we deployed in government security will be channelled to the private sector in the second half of the year because that is where we see our returns being better than government security,” said Family Bank’s chief financial officer, Paul Ngaragari, during the bank’s investor briefing.
The quick cut in deposit rates, accompanied by a slow reduction of lending rates, saw banks continue to post profit growth despite a tough economic environment. Interest rates declined by 1.5 percentage points to average 15.8 percent, leaving the banks with wider interest margins.
The banks’ average spread – difference between lending and deposit rates - was 9.2 percent in June 2025, up from 8.5 percent the previous year.
Retail depositors receive lower returns from banks, which averaged 3.76 percent in June, down from 5.11 percent a year earlier.
Banks pay retail depositors interest on the amount held in the account during the month, resulting in measly returns for most, given that many people withdraw from the accounts to settle monthly obligations.
The return offered by the banks to retail savers is lower than the inflation rate of 4.1 percent, meaning they are left worse off when they hold the cash in banks, unlike large depositors who earn a real return.
