Eight commercial banks raised interest rates in the year to August, placing them on a collision course with the Central Bank of Kenya (CBK), which has threatened daily fines on lenders that deny borrowers lower interest charges.
The overall weighted average lending rates of DIB Bank Kenya, Consolidated Bank of Kenya, Co-operative Bank of Kenya, Kingdom Bank, UBA Kenya Bank, Diamond Trust Bank Kenya, Premier Bank Kenya, and Access Bank Kenya have increased over the past year, according to fresh CBK data.
The banking regulator has put pressure on banks to lower borrowing costs and match cuts in the benchmark Central Bank Rate (CBR).
Between August 6 and August 12, the CBK cut the benchmark rate seven times by 3.5 percentage points to 9.5 percent from a 22-year high of 13 percent that lasted for about seven months.
Only six banks — Citibank N.A Kenya, Absa Bank Kenya, Credit Bank, Standard Chartered Bank Kenya, Stanbic Bank Kenya and Victoria Commercial Bank — have cut their overall lending rates to match or exceed the benchmark.
This comes amid pressure from the central bank, which announced that it would not hesitate to impose daily fines on banks that are reluctant to reduce lending rates in line with cuts on the benchmark rate.
Bank profits surged as they passed the higher interest rates on to borrowers far more quickly than to savers.
Another 24 banks have cut interest rates, but matched the benchmark rate after trimming their borrowing costs by between 0.09 percentage points and 2.82 percentage points, CBK data shows.
Some lenders reckoned they had locked in deposits used for loans at higher rates, arguing that the costly savings had slowed efforts to lower borrowing costs.
The banking regulator in August unveiled a new loan pricing model, which is based on a single rate determined by average interbank rates.
The bankers and the regulator agreed that the current model, where each bank has its base rate, has failed to take the cue from monetary policy actions like cuts on the benchmark rate.
Last month, the CBK told banks to end excuses for failing to reduce the cost of loans in line with the reduced benchmark rate as the revised risk-based pricing regime took effect.
“There should be no excuse by banks for whatever reason…there have been quite a number of excuses. This time, there won’t be an excuse. Once we lower the (benchmark) rate, banks should also lower their rates,” CBK Governor Kamau Thugge said.
Commercial banks have a grace period of six months up to the end of February 2026 to implement the new formula on loan pricing.
Lenders have three months up to December 1, 2025 to start using the revised formula on newly issued loans and a six-month window up to March 1, 2026, to apply the model to existing loan facilities.
“There was a challenge of capacity within banks when setting up risk-based pricing in 2019 and 2020. Because of competition, most banks did not seek assistance. For the majority, the feedback was that interest rates were always going up, leading some to abandon their frameworks,” said Raimond Molenje, CEO of Kenya Bankers Association (KBA).
“I would equate the industry benchmark to the wholesale price of a shopkeeper selling soap. Previously, everybody had their wholesale price. There was no uniform parameter for the Central Bank Rate (CBR) to speak to. Kesonia is now our wholesale price,” Mr Molenje added.
The CBK has renamed the interbank to Overnight Interbank Rate Kenya Shilling Overnight Interbank Average (Kesonia).
Under the new model, the total lending rate will be the interbank rate plus a premium or K, which is believed to align with the policy rate.
Interbank rate
The interbank market rate refers to the rate at which commercial banks borrow and lend money among themselves on a short-term basis and is widely relied upon as the gauge of how liquid the market is.
The premium K will be a factor of a bank’s operating costs related to its lending business, the expected return to shareholders, and the borrower’s risk premium.
The interbank rate, however, has limits in terms of volatility because it operates within limits fixed on the CBK benchmark rate to ensure the benefits of monetary policy are transmitted to the real economy.
The limit current stands at plus or minus 75 basis points of CBR.
This means that the interbank rate cannot rise above 0.75 percentage points of the CBR of 9.5 percent or a maximum of 10.25 percent, and not less than 8.75 percent.
