Kenyan borrowers left behind as lending rates ignore CBK cuts
By Print Reporter, August 2, 2025The gap between Kenya’s Central Bank Rate (CBR) and commercial bank lending rates has widened to its highest level in years, raising fresh questions about the effectiveness of monetary policy and the affordability of credit.
By May 2025, the average lending rate stood at 15.4 per cent, even as the CBR had been slashed to 9.75 per cent—a 5.7 percentage point spread that marks the steepest divergence since interest rates began easing in September 2024.
Ordinarily, reductions in the CBR are expected to lower borrowing costs and stimulate economic activity. But banks have largely resisted following suit, maintaining high lending rates that reflect elevated risk premiums, expensive funding structures, and efforts to safeguard profit margins.
Analysts warn that this weak transmission of policy signals a deeper issue within Kenya’s credit market—one where structural inefficiencies and the market power of lenders dilute central bank influence.
“The gap has grown steadily since September 2024, as banks remain slow to transmit CBR cuts to borrowers,” Mwango Capital noted in a recent research report.
The reduction in the CBR is not translating into cheaper loans for households or businesses because banks are prioritising profitability and risk buffers over monetary policy guidance.
The shift in interest rate-setting mechanisms mirrors changes seen in global financial hubs like London and New York, where former benchmarks such as Libor and Nibor (now banned) were exposed to manipulation and rigging.
The Central Bank of Kenya has since bowed to sustained pressure from commercial banks to replace the CBR as the benchmark reference rate for loan pricing.
Going forward, lenders will be allowed to peg their rates to the interbank rate, which reflects actual market funding costs but is often more volatile.
This transition to market-based pricing is expected to further disconnect lending rates from the CBK’s monetary stance, reducing its control over borrowing conditions.
Bankers have long argued that the CBR does not accurately capture their real cost of funds, advocating for a more market-driven base rate as a transparent alternative.
However, critics caution that the shift could entrench higher interest rates and further limit access to credit, especially for small and medium-sized enterprises already grappling with liquidity constraints.
Lending rates have climbed sharply since early 2023, following an aggressive tightening cycle that pushed the CBR to a peak of 13 per cent by late 2023.
While the CBK has since reversed course, cutting rates by more than 300 basis points, banks have not responded with equivalent reductions.
Data from the CBK shows commercial lending rates rose from below 13 per cent in early 2022 to over 16 per cent by late 2024.
Despite recent easing, the May 2025 figure of 15.4 per cent remains only slightly below last year’s peak.
Part of this lag is attributed to existing loan contracts that adjust slowly. However, observers point out that banks have also increased their margins in response to inflation risks, currency volatility, and rising credit defaults.
Lenders say the high cost of funds and an uptick in non-performing loans have forced them to price conservatively.
They also cite increased capital and liquidity requirements under Basel III as further contributors to upward pressure on interest rates.
Still, the growing mismatch between the central bank’s policy rate and commercial lending rates undermines CBK’s objective of stimulating the economy through cheaper credit.
It also casts doubt on the potency of monetary policy tools in the current economic climate.
The spread between the base rate and actual loan pricing is likely to widen further during periods of market stress.
The adoption of the interbank rate as the new benchmark may also introduce more volatility in lending rates—especially during liquidity crunches—raising concerns about transparency and predictability for borrowers.