Kenyan commercial banks have finally bowed to pressure from the Central Bank of Kenya (CBK) and will lower their lending rates starting December 2024. This move comes after the CBK's Monetary Policy Committee reduced the benchmark rate by 75 basis points to 11.75%, the lowest level since the Covid-19 pandemic.

Despite three successive rate cuts, the gap between the Central Bank Rate (CBR) and lending rates has widened to a 31-month high, raising concerns about the slow transmission of monetary policy changes to customers. In October, the spread between CBR and commercial lending rates rose to 5.15%, as average interest rates rose to 17.15% from 16.91% in September.

CBK Governor Kamau Thugge has been vocal about the need for banks to align their lending rates with recent reductions in CBR, warning that failure to do so could harm the economy. "All we are asking is for banks to be fair and to act in the same way that they were quick to raise lending rates when the policy rate was increasing and the treasury rates were increasing," Kamau said. "I think it's in banks' interest to lower their lending rates. If they continue on this path, it will be a no-win for anyone, and the economy will not be able to perform."

In response to the CBK's pressure, the Kenya Bankers Association (KBA) has announced that its 43-member banks will begin reviewing loan interest rates to "unlock access to affordable credit." The decision comes after the lenders ignored the regulator's previous warnings that retaining high interest rates was hurting private sector growth.

The KBA has welcomed the rate cuts, but is also calling for larger reductions from the CBK to effectively stimulate lending and economic growth. "The recent successive cuts in the Central Bank Rate (CBR) have implications on both deposit and lending rates in the market. Banks are taking steps to lower interest rates and make borrowing more affordable," the KBA said in a statement. "Individual banks are issuing the requisite notices to customers indicating reductions in loan rates from December 2024, and these reductions will continue progressively in line with the evolution of monetary policy."

The move to lower lending rates is expected to have a positive impact on the economy, making borrowing more affordable for individuals and businesses. This, in turn, could stimulate economic growth and increase access to credit for those who need it most. As the Kenyan banking sector adjusts to the new reality, it remains to be seen how effectively the rate cuts will be transmitted to customers and what the long-term implications will be for the economy.

In the broader context, the Kenyan banking sector's response to the CBK's pressure serves as a reminder of the importance of regulatory bodies in shaping the financial landscape. As the sector continues to evolve, it will be crucial for banks, regulators, and policymakers to work together to create an environment that supports economic growth and financial inclusion.