The Central Bank of Kenya (CBK) has taken a tough stance on commercial banks, threatening them with daily fines if they fail to cut lending rates in response to successive monetary policy adjustments. The regulator's move aims to stimulate economic activity and support struggling households and businesses.

According to Kenya's Banking Act, the CBK can impose fines of KES 20 million ($154,619) or three times the monetary gain on banks that fail to comply with industry regulations. Lenders also face a daily penalty of KES 100,000 ($773) per violation, while bank officials may be fined up to KES 1 million ($7,730). Leading banks, including KCB Group, Equity Group, Cooperative Bank, I&M, and DTB, have already cut interest rates by one to four percentage points.

Equity Bank's latest rate cut this week marks its third reduction in six months, making it the only major lender to have consistently lowered borrowing rates in response to CBK's monetary policy adjustments. A senior CBK official, who requested anonymity, stated that the regulator wants recent monetary policy decisions to be passed down to borrowers, which the banks have not done. "If banks don't comply, they will be penalized," the official warned.

The CBK has increased surveillance of banks, conducting onsite inspections to ensure lenders price their loans based on their risk-based models and the falling central bank rate. Other banks that have not complied are expected to cut their rates to avoid unnecessary financial penalties. CBK Governor Kamau Thugge emphasized that banks should be fair and act in the same way they did when the policy rate was increasing and treasury rates were rising.

Thugge summoned bank executives in November and December 2024, urging them to lower borrowing costs to support the economy. However, only a handful of lenders, like Equity, complied with the directive. Despite three successive rate cuts, the gap between the central bank rate and lending rates has widened to a near three-year high, raising questions about the low transmission of monetary policy changes to customers.

The average interest rate hit 17.22%, an eight-year high, cutting private sector credit growth by 1.4%. Since August 2024, CBK has cut the benchmark rate by 2.25 basis points to 10.75, with the latest being February 5, 2025. The regulator's efforts to stimulate economic activity and support struggling households and businesses are expected to continue, with banks under pressure to comply with the directive.

The CBK's crackdown on commercial banks is a significant development in Kenya's financial sector, and its implications will be closely watched by industry stakeholders and economists. As the regulator continues to push for lower lending rates, it remains to be seen how banks will respond and what the ultimate impact will be on the economy.