The economic growth depends on a delicate balance of fiscal policies, investment incentives, and access to affordable credit.

With the recent decision by the Central Bank of Kenya (CBK) to lower the Central Bank Rate (CBR) by 50 basis points to 10.75 per cent, and the Cash Reserve Ratio (CRR) by 100 basis points to 3.25 per cent, there is a clear acknowledgment that the cost of borrowing needs to come down to stimulate business activity.

However, the true impact of this policy shift will only be felt if commercial banks implement these changes swiftly and effectively.

Interest rates play a critical role in determining the pace of economic growth. When rates are high, businesses struggle to access affordable loans for expansion, job creation slows, and consumer spending weakens.

The reduction in the CRR is designed to inject more liquidity into the banking system, lowering the cost of funds and ultimately leading to reduced lending rates. However, there is a growing concern that commercial banks may be slow to pass on these benefits to borrowers, dampening the intended impact of the monetary policy changes.

Recognising this challenge, the CBK has intensified its oversight of lenders to ensure compliance with the new monetary stance. It has embarked on on-site inspections to ascertain whether banks are implementing the Risk-Based Credit Pricing Model (RBCPM) fairly and transparently.

Under recently enacted amendments to the Banking Act, banks that fail to adjust their lending rates accordingly will face penalties. This is a necessary step to ensure that the relief intended for businesses and individuals is not lost in bureaucratic delays or profit-driven resistance from financial institutions.

For small and medium-sized enterprises (SMEs), which form the backbone of Kenya’s economy, access to affordable credit is a matter of survival. SMEs contribute significantly to job creation and economic development, yet many struggle with high borrowing costs.

Lower interest rates would allow them to expand operations, invest in new technologies, and increase employment. When credit becomes more accessible, businesses can also improve cash flow management, reducing the risk of insolvency and ensuring long-term stability.

Beyond SMEs, individual borrowers also stand to benefit from lower lending rates. High-interest loans have been a burden for many Kenyans, especially in a tough economic climate where inflation and living costs continue to rise. Cheaper credit means households can afford mortgages, personal loans, and education financing with less strain. This, in turn, boosts consumer spending, which is a key driver of economic growth.

Despite the positive outlook, challenges remain. The effectiveness of monetary policy changes depends not just on banks’ willingness to adjust rates but also on overall market conditions.

Inflationary pressures, government borrowing, and external economic factors all play a role in shaping Kenya’s financial landscape. If inflation remains high, banks may be hesitant to lower rates aggressively, fearing an erosion of returns on their loan portfolios.

Similarly, high levels of government borrowing can crowd out private sector credit, limiting the impact of lower interest rates on businesses and consumers.

To maximize the benefits of the recent monetary policy adjustments, several measures must be taken.

First, the CBK must enforce transparency in the banking sector, ensuring that rate reductions are implemented swiftly. Lenders should be required to publish clear data on how their interest rates evolve in response to changes in the CBR and CRR. This will enhance accountability and allow businesses and consumers to make informed financial decisions.

Second, financial literacy initiatives should be strengthened to help Kenyans understand the implications of interest rate changes.

Many borrowers remain unaware of their rights and may not realize when they are being charged unfairly high rates. Educating consumers on financial management, loan options, and credit terms will empower them to take full advantage of lower rates when they become available.

Lastly, the government must take a more proactive role in promoting alternative sources of financing.

While bank loans remain the primary source of credit for most businesses, developing robust capital markets, venture capital funding, and public-private partnerships can provide additional avenues for economic support.

A diversified financial ecosystem reduces over-reliance on traditional banking institutions and ensures that businesses have multiple options when seeking funding.

The writer is a reporter with the People Daily Newspaper.