The Central Bank of Kenya (CBK) has directed commercial banks to reduce interest rates in line with monetary policy changes under the Risk-Based Credit Pricing Model (RBCPM). CBK governor Kamau Thugge appeared before MPs on Tuesday. Why Kenyan banks could be penalised Speaking before the National Assembly Finance Committee on Tuesday, March 25, CBK governor Kamau Thugge stated that the regulator had lowered the Central Bank Rate (CBR) to 10.75% to encourage economic growth. However, he revealed some lenders were yet to comply by passing the benefits to consumers. The regulator announced it had started onsite inspections to verify compliance. Thugge warned that banks found lending at higher rates despite decreased funding costs will be subject to harsh penalties, which could include fines equal to three times their unfair gains.
“To find out if banks’ cost of funding has decreased, we are performing on-site inspections. If it has, we anticipate that lending rates will reflect that. According to the Business Laws (Amendment) Act, banks face fines equal to three times their unjust earnings if they are shown to be making unfair profits by failing to lower rates,” Thugge stated. Thugge noted that banks were slow to reduce lending rates when monetary policy was eased but quick to raise them when the CBR increased. How govt’s domestic borrowing affects rates The governor of the CBK disclosed that the government’s increasing domestic borrowing was a major factor influencing lending rates, contending that it was limiting the private sector’s access to credit.
“Before the Finance Bill 2024’s withdrawal at the beginning of this fiscal year, the estimated net domestic borrowing was below KSh 400 billion. Later on, that amount rose to KSh 430 billion, and now it stands at KSh 584 billion due to the second supplementary budget,” he explained. He clarified that commercial banks would rather lend to the government, which is regarded as a risk-free customer, than to private companies, which already face a high percentage of non-performing loans. “It is simple for banks to choose between financing to the private sector, which has a higher percentage of non-performing loans, and lending to the government, which does not default,” he added. How much are Kenyans borrowing daily?
On Tuesday, March 25, TUKO.co.ke reported that the country has about eight million active digital borrowers who borrow KSh 500 million daily, amounting to KSh 15 billion monthly. Meanwhile, the CBK has reinforced consumer protection laws, reducing monthly complaints from 4,000. Monthly smartphone loans from digital lenders have increased internet access, allowing more Kenyans to participate in the gig economy, digital payments, and e-commerce.
by Japhet Ruto
