The Central Bank of Kenya (CBK) will this week step up pressure on banks to cut lending rates at a crunch meeting with chief executives of top lenders who have started lowering interest on savings.
The regulator is concerned that banks are quick to cut deposit rates but slow to lower lending rates in line with cuts in the benchmark rate, delaying relief to borrowers plagued with costly loans.
Kenya Bankers Association (KBA)— the bankers’ lobby—said the meeting with the regulator over the rates would happen this week.
The CBK had on October 16 announced that it would turn the screw on the chief executives of top banks like KCB, Equity, Cooperative Bank, NCBA, I&M, Absa, Standard Chartered and DTB to lower lending rate at a “brainstorm” meeting.
Fresh CBK data show the savings rate — the return paid by banks for demand (short-term) deposits– fell to 3.57 percent in September from 4.56 percent in July.
The spread –the difference between the average lending rate and the fixed deposit rate– increased to 5.67 percent in September from 5.56 percent in July as banks cut returns on high-net fixed deposits.
The average return on fixed deposit rate fell to 11.24 percent at the end of September compared to 11.28 percent in July.
The average lending rate meanwhile rose to 16.91 percent from 16.84 percent in the same period despite the Treasury’s and the CBK’s push for lower interest rates.
The CBK on October 8 lowered its benchmark interest rate by 75 basis points from 12 percent—the largest cut since the start of Covid-19-induced economic hardships in March 2020.
This followed the lowering of the standard rate by 25 basis points in August to 12.75 percent, a drop analysts reckon is yet to reflect on lending rates at a time when demand for credit has slowed to levels seen in 2017.
KBA reckons that deposit rates have fallen faster than borrowing costs as banks anticipate lower loan rates in upcoming months in what has prompted them to avoid getting stuck with costly fixed deposits for longer periods.
Banks and savers usually agree on the fixed rate of return on deposits before the monies are put into accounts.
“The intention is also to adjust lending rates downwards. Given deposits are long term in nature, you must agree with a depositor today that you will be paying them a certain rate of return in six months or a year’s time,” said KBA acting chief executive officer Raimond Molenje.
“With bank margins from lending expected to shrink, that translates into a lower deposit rate.”
Inflation dropped to its lowest level since December 2012 at 3.6 percent in September and fell further to 2.7 percent in October, keeping the cost of living measure within the government targets of between 2.5 percent and 7.5 percent in the medium term.
This has offered the CBK room to cut the benchmark rate or CBR.
The fall in CBR was expected to trigger a fall in the cost of loans for households and firms, which have struggled to service costly credit since CBK started raising rates in June 2022 amid global economic shocks that saw inflation rise to multi-year highs.
Instead, commercial banks’ average lending rate rose marginally in October, defying CBK signals for a fall in loan costs after the benchmark rate was cut for the first time in four years.
The CBK considers credit growth of 12 to 15 percent to be sufficient to support a healthy growth of the economy.
Banks have stated that a lengthy monetary policy transmission exists as they expect the impact of the CBK cuts to hit home in two to three months.
“The rates are coming down, but it’s a 30-day notice, so even the changes made have not necessarily worked themselves into the rates yet. I think you’ll start to see the change manifest itself from this month to December,” KBA chairman John Gachora said in a previous interview.
Government officials, including President William Ruto and Treasury Cabinet Secretary John Mbadi, have lobbied for lower borrowing costs.
Private sector credit growth slowed down to a 22-year low of 0.4 percent in September from 1.3 percent in August, marking the lowest rate of credit growth to the sector since September 2003 (-0.6 percent).
KBA is cautioning that the anticipated drop in commercial bank interest rates will not be uniform as lenders have applied varying interest rates to facilities since the entry of risk-based pricing.
“Once we moved out of the interest rate capping regime to the risk-based model, banks have been applying different rates to both lending and deposit rates,” Mr Molenje said.
“Some banks will adjust downwards faster than others, especially when the CBK benchmark rate is a key component to their risk-based pricing model.”
