The gap between what Kenyan banks charge for loans and what they pay for savings is currently at a nine-year high of more than 7 percentage points, leaving borrowers and savers worse off despite falling policy rates. For borrowers, the average loan interest rate is still high at 15.07% while for savers, the average deposit rate is at a moderate 7.63%.
The regulator, CBK has been cutting the Central Bank Rate (CBR), to make borrowing cheaper and stimulate the economy by reducing the rate from 13.00% to the current 9.25%. However, lenders have responded unevenly to CBK’s rate cuts. The lending rates have eased by just 1.77 percentage points between August last year and September this year while deposit rates have fallen by 3.65 percentage points in the same period.
This is the highest spread since August 2016, when the gap reached 11.29% just before Kenya introduced lending caps to mitigate the cost of credit. The widening gap suggests that banks have been slow to pass on lower interest rates to borrowers, even as they moved quickly to cut what they pay depositors, a trend that reflects profit protection in the sector.
CBK’s Stance on Uncomplying Banks
Following the concerns, Dr. Kamau Thugge, the CBK Governor, intervened forcefully and threatened the lenders with fines and introduced measures to improve rate transmission, including a new loan pricing formula (KESONIA) and moral suasion to encourage banks to lower lending rates. This new system directly ties banks’ lending rates to the CBKs official rate.
On the other hand, lenders have argued that they need to keep rates high due to risks in sectors like manufacturing and real estate. However, the regulator believes the new Kenya shilling overnight interbank average (KESONIA) system will mitigate this.
KESONIA is closely tied to the CBR under interest rate corridor framework, where overnight lending rates for borrowing between banks are held at no more or less than 0.75% for the benchmark.
“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.” – Dr. Kamau Thugge.
The regulator’s objective of stimulating private sector credit faces a significant headwind from persistent high borrowing costs. The sectors credit growth remains weak, reaching 6.0% in September.
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