KBA Urges Banks to Respond Swiftly to CBK’s Rate Cuts and Lower Loan Costs for Consumers

December 9, 2024

The Kenya Bankers Association (KBA) has confirmed that several banks have started reducing loan interest rates, effective this December. This announcement follows a series of recent monetary adjustments by the Central Bank of Kenya (CBK) aimed at easing borrowing costs for consumers and businesses.

In a statement issued on Sunday, December 8, 2024, KBA noted that select banks have already begun notifying their customers about the reduction in loan rates. According to KBA Chairman John Gachora, this reduction will occur progressively, aligning with the recent drop in the benchmark lending rate.

“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 and credit risk factors,” the KBA’s statement explained.

Gachora further emphasized that the business of banking revolves around mobilizing deposits and extending loans. This practice will see continued loan rate reductions, even while accounting for the prolonged high cost of customers’ deposits that were locked in during the period of elevated interest rates before CBK implemented rate cuts.

Customer Risk Profile Assessment

However, KBA clarified that each bank will individually assess customer risk profiles before implementing changes to loan interest rates. This is in response to the banking sector’s transition to risk-based credit lending, which evaluates customers’ individual financial circumstances to determine credit costs.

Gachora explained: “As the banking sector transitioned to a risk-based credit pricing environment, each bank is mandated to assess its customers’ risk profiles and price their credit accordingly. This is based on the individual bank’s approved base rate and the valuation of the risk premium.”

He further noted that while base rates are largely influenced by the Central Bank Rate and government borrowing costs, customers’ risk premiums depend on market conditions such as non-performing loans and challenges affecting borrowers’ ability to repay their loans. This risk-based system allows banks to create flexible credit terms while maintaining financial stability.

While acknowledging the financial difficulties many customers face, KBA has emphasized ongoing discussions with the Kenya Kwanza administration and other stakeholders to improve affordable credit access.

According to KBA, these efforts aim to address financial challenges, ensure credit remains accessible, and promote economic growth through strategic solutions.

CBK’s Policy Changes

The reduction in loan interest rates follows the CBK’s recent decision to cut the benchmark lending rate by 75 basis points, lowering it to 11.25 percent. This marks the third reduction by the Central Bank in 2024 as part of efforts to boost economic recovery.

During the final Monetary Policy Committee meeting of the year, CBK Governor Kamau Thugge attributed the decision to cut rates to factors such as cooling inflation, a relatively stable currency, and a slowing economy during the first half of the year. Thugge expressed optimism that this rate cut would ease borrowing costs for consumers and businesses alike.

Despite the third consecutive rate cut, Thugge has raised concerns over the slow response by some banks in lowering their interest rates. During recent discussions with the CEOs of major banks, Thugge urged financial institutions to align their loan interest rates with the benchmark rate reductions.

“Certainly, the banks have been sluggish in lowering their interest rates, and as you know, I have had meetings with the banks,” Thugge said. “I do believe that they now understand they need to start aggressively lowering interest rates to consumers.”

The Governor’s remarks underscore efforts to ensure that reduced benchmark rates translate into meaningful borrowing relief for consumers and businesses. Thugge’s comments suggest that the CBK is actively monitoring the financial sector’s response to policy adjustments to ensure economic stability.

This ongoing collaboration between the CBK, KBA, and the Kenya Kwanza administration seeks to address financial hurdles and ensure equitable access to affordable credit. With interest rates projected to decrease further, these efforts aim to support households and businesses by making borrowing easier and more affordable in the face of economic uncertainties.

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