Banks increase loan margins as deposit rates fall

Commercial banks in Kenya have increased their lending margins by lowering deposit rates at a faster pace than loan interest rates, ensuring steady profitability.

Data from the Central Bank of Kenya (CBK) shows that this trend has widened interest rate spreads over recent months.

Lending margins, which reflect the difference between what banks charge on loans and what they pay depositors, are influenced by factors such as credit risk, operational expenses, and market conditions.

Since August last year, when domestic interest rates began to decline, banks have been adjusting deposit rates more rapidly than lending rates.

In February 2025, the lending margin rose to 6.65 percent, up from 6.59 percent in January and 6.44 percent in December.

This increase was driven by a drop in deposit rates from 11.14 percent in August to 9.76 percent in February, while the average lending rate only declined slightly from 16.84 percent to 16.41 percent.

Bank executives acknowledge that borrowing costs remain high, partly due to differences in risk-based loan pricing models across financial institutions.

"Each lender has a different benchmark from which loan interest rates are set, resulting in a minimal adjustment to borrowing costs across the industry," they said.

Discussions between banks and the CBK are ongoing to review the risk-based loan pricing framework.

The goal is to establish a standard benchmark interest rate for all banks, which would help create a more uniform structure for borrowing costs while taking into account funding expenses and customer risk profiles.