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Relief for borrowers as banks cut lending rates to 17-month low
As borrowers enjoy a relief on lending rates, those who have put their money in banks for a return are taking a hit as lenders continue to reduce the returns on deposits.
The average lending rate for bank loans dropped to a 17-month low of 15.28 percent at the end of June, offering a relief to borrowers as lenders responded to cuts in Central Bank Rate (CBR) and easing cost of funds.
Latest Central Bank of Kenya (CBK) disclosures show the average lending rates have been dropping over the past seven months.
The June figure nearly matched the 15.2 percent that was witnessed in January 2024 before rates started rising, peaking at 17.22 percent in November last year.
The latest average lending rate is 1.94 percentage points below the peak of 17.22 percent, which was the highest in eight years.
The easing cost of credit has coincided with a fall in CBR. The benchmark lending rate had stayed at a 22-year high of 13 percent between February and August last year before CBK started reducing the rate on easing inflation and stabilised exchange rate.
This year, CBK has reduced CBR thrice –in February, April and June– by a cumulative 1.5 percentage points to 9.75 percent. This year’s cuts follow three cuts in 2024, which delivered a cumulative reduction of 1.75 percentage points.
As borrowers enjoy a relief on lending rates, those who have put their money in banks for a return are taking a hit as lenders continue to reduce the returns on deposits.
CBK data shows the average deposit rate had by June dropped to a 23-month low of 8.37 percent after six consecutive months of decline.
The cuts come in an environment in which returns on government paper, which were rising last year, have been coming down in line with falling CBR.
The downward adjustment on returns on deposits has helped banks reduce their interest expense even as they kept the difference between the average lending rate and CBR above five percent.
CBK governor Kamau Thugge had warned of consequences, including daily fines, on banks that fail to make credit cheaper for individuals and businesses in line with reduced CBR. The regulator’s push saw most banks move to cut their rates.
CBK’s Monetary Policy Committee (MPC) is set for a meeting on August 12. The committee has been reducing the benchmark rate in a bid to stimulate lending by banks to the private sector and supporting economic activity.
Inflation remains within the government’s targeted range of between 2.5 percent and 7.5 percent, standing at 4.1 percent in July and which marked a three-month high. The shilling remains relatively stable against the dollar, having averaged below 130 units since August last year.
Banks have been asking for aggressive cuts in CBR in line with the inflation and exchange rate figures. Their concern, however, remains with the elevated loan defaults, with the non-performing loans ratio having closed April at 17.6 percent.
