NAIROBI, Kenya Mar 25 – The Central Bank of Kenya (CBK) has warned commercial banks against failing to lower interest rates in line with monetary policy adjustments under the Risk-Based Credit Pricing Model (RBCPM).
Appearing before the National Assembly Finance Committee, CBK Governor Kamau Thugge said the regulator has launched onsite inspections to ensure compliance after reducing the lending rate to 10.75 percent to spur business growth.
Banks found to be maintaining excessive lending rates despite lower costs of funds will face severe penalties, including fines amounting to three times their unjust gains.
“We are conducting onsite inspections to determine if the cost of funds for banks has gone down. If it has, then we expect lending rates to follow suit,” Thugge stated.
“If banks are found to be profiting unfairly by not adjusting rates downward, they will face penalties equal to three times their unjust gains, as provided under the Business Laws (Amendment) Act.”
Thugge noted that while banks quickly raise lending rates when the Central Bank Rate (CBR) increases, they are slow to reduce them when monetary policy is eased.
Government Borrowing Impact
The CBK Governor also highlighted the government’s rising domestic borrowing as a key factor affecting lending rates, arguing that it is crowding out private sector access to credit.
“When we started this financial year, before the Finance Bill was withdrawn, the projected net domestic borrowing was slightly below KSh 400 billion. That figure later increased to KSh 430 billion, and with the second supplementary budget, it has now risen to KSh 584 billion,” he said.
He explained that commercial banks prefer lending to the government—considered a risk-free borrower—rather than private businesses that already struggle with high levels of non-performing loans.
“If banks have a choice between lending to the government, which does not default, and lending to the private sector, which has elevated non-performing loans, it’s an easy decision for them,” Thugge said.
He also attributed the slow decline in lending rates to increased competition for deposits, as banks struggle to attract funds amid a favorable investment climate for government securities.
The introduction of the Central Securities Depository (CSD) has made it easier for Kenyans to invest in Treasury bills and bonds, reducing banks’ access to cheap deposits and affecting lending rates.
MPs Demand Legislative Action
Members of Parliament urged legislative measures to ensure reductions in the CBR are directly reflected in commercial lending rates, amid concerns that banks are slow to pass on the benefits to borrowers.
Finance Committee Chair Kimani Kuria criticized CBK for not proposing stronger protections for the private sector, saying, “Where do we leave the private sector when the government is competing for loans with businesses? We wish you had said you will protect the private sector despite these issues.”
Homa Bay Town MP Peter Kaluma questioned what legal steps Parliament could take to make interest rate reductions mandatory.
“What kind of legislative intervention should Parliament put in place to mandate that whenever we have these reductions, they are reflected in commercial rates?” he asked.
Rachuonyo MP Okuome Adipo warned that high interest rates disproportionately affect small and medium enterprises (SMEs) seeking capital.
“Those who are poor will be disadvantaged due to higher lending interest, which will increase borrowing costs,” he noted.
Butula MP Joseph Oyula raised concerns about the government’s heavy domestic borrowing, arguing that it pushes up interest rates for businesses and individuals.
“The government’s appetite to borrow domestically will affect lending rates. Treasury and CBK should sit down and look for ways to reduce the repayment interest on Treasury bills and lower borrowing appetite. It’s healthier to borrow externally than domestically,” he said.
CBK Opposes Interest Rate Caps
Governor Thugge cautioned against reintroducing interest rate caps, arguing that past attempts led to credit rationing, especially for SMEs and high-risk borrowers.
“If we don’t control fiscal consolidation, we will not be able to control interest rates. If we try to cap credit, we will end up rationing it, locking out the disadvantaged,” he warned.
CBK is finalizing a new risk-based pricing model for loans within the next two weeks to improve interest rate transmission. The model will incorporate international best practices while adapting to Kenya’s economic conditions.
Source: capitalfm
