Central Bank of Kenya’s (CBK) recent cut in the base lending rate to 12 per cent has primarily impacted the money market, leading to a drop in interbank rates and an easing of liquidity.

However, the broader economy is yet to see significant benefits. The rate cut reflects initial responses to CBK’s monetary policy adjustments, showing a more active banking sector, but its effect on the economy remains limited.

Analysts at Cytonn Investment noted in a weekly report that “liquidity in the money markets eased, with the average interbank rate decreasing by 27.9 basis points (bps), to 11.9 per cent from the 12.2 per cent recorded the previous week, partly attributable to government payments that offset tax remittances.” The report also noted that the average interbank trading volumes increased by 29.1 per cent to Sh44 billion, up from Sh34.1 billion the previous week.

While the base rate cut aims to stimulate economic activity by reducing borrowing costs, which work by passing the lower rates on to the consumers, analysts note that many banks remain reluctant to pass these benefits on to borrowers, especially small and medium enterprises (SMEs), which are crucial for economic growth.

This hesitation has drawn criticism, as it suggests banks may be capitalising on high borrowing costs while borrowers continue to face expensive loans.

So far, NCBA Bank is the only institution that has announced rate reductions for loans in both Kenya Shillings and US Dollars. “In view of the recent Kenya Central Bank Rate (CBR) downward revision, we wish to advise that NCBA Bank Kenya’s base lending rates will be revised downwards to 16.91 per cent for Kenya Shilling loans and 11.09 per cent for US dollar-based loans,” the bank stated in a notice to customers last week.

In response to concerns, the regulator has summoned commercial bank Chief Executive Officers (CEOs) to discuss the importance of passing on the benefits of rate cuts to consumers and businesses, stressing the need for these reductions to translate into tangible economic relief.

It remains to be seen whether the easing of liquidity in the money market, partly due to government payments offsetting tax remittances, can address the issue of pending bills and improve cash flow for contractors and suppliers. This would help businesses meet their financial obligations, avoid cash flow problems, and invest in growth opportunities.

Interbank volumes traded

As of June 30, 2024, the government had pending bills totalling Sh516.3 billion, with Government Ministries, Departments, and Agencies (MDAs) accounting for Sh136.5 billion, or 26 per cent of the total.

The increase in interbank volumes traded also suggests a more active and confident banking sector. Higher interbank volumes indicate that banks are more willing to lend to each other, reflecting a healthy and functioning financial system.

This increased activity can enhance liquidity in the market, making it easier for banks to meet their short-term funding needs and support lending to the broader economy. The reluctance so far of banks to adjust their lending rates is particularly concerning, given the rising levels of non-performing loans (NPLs), which surged to Sh74.9 billion in August 2024.

This increase highlights the financial strain on borrowers who are grappling with high costs of credit amidst an economic environment characterised by sluggish demand for goods and services.

Lowering lending rates is seen as crucial not only for easing credit access but also for curbing loan defaults and rekindling economic activity