Eight commercial banks have gone against the Central Bank of Kenya’s directive to reduce lending rates in line with the recent cuts to the benchmark rate, setting the stage for a standoff with the regulator, which has threatened daily fines for non-compliance.
Fresh data from the central bank shows that DIB Bank Kenya, Consolidated Bank of Kenya, Co-operative Bank of Kenya, Kingdom Bank, UBA Kenya Bank, Diamond Trust Bank Kenya, Premier Bank Kenya, and Access Bank Kenya have all raised their overall weighted average lending rates in the year to August.
This defiance comes despite the central bank reducing the benchmark Central Bank Rate (CBR) seven times between August 6 and August 12, bringing it down by 3.5 percentage points from 13 percent to 9.5 percent. The 13 percent rate had remained in place for about seven months — the highest level in 22 years.
While eight banks raised rates, only six lenders; Citibank N.A Kenya, Absa Bank Kenya, Credit Bank, Standard Chartered Bank Kenya, Stanbic Bank Kenya and Victoria Commercial Bank have adjusted their lending rates to meet or go below the revised benchmark.
The regulator has made it clear that it will not tolerate lenders that fail to lower borrowing costs as required. It has announced plans to impose daily penalties on banks that continue to hold back on reducing rates despite the policy changes.
At the same time, another 24 banks have cut their lending rates, but only to match the benchmark after lowering their costs by between 0.09 and 2.82 percentage points.
Some banks have argued that they had already locked in expensive deposits, which are now being used to fund loans, saying this has slowed their ability to lower interest charges.
To address these gaps, the central bank in August rolled out a new loan pricing formula based on a single rate determined by average interbank rates. This replaces the existing system where each bank sets its own base lending rate, which regulators say has not adequately reflected monetary policy changes such as cuts to the CBR.
Last month, the central bank told lenders to stop giving excuses for failing to lower borrowing costs as the revised risk-based pricing model took effect.
“There should be no excuse by banks for whatever reason... there have been quite a number of excuses. This time, there won’t be an excuse. Once we lower the (benchmark) rate, banks should also lower their rates,” CBK Governor Kamau Thugge said.
Banks have been given until the end of February 2026 to fully implement the new pricing model. They are expected to start applying the revised formula to all new loans by December 1, 2025, and extend it to existing loan facilities by March 1, 2026.
The pressure from the regulator comes at a time when banks have been enjoying higher profits, having increased lending rates faster than the returns passed on to depositors during the previous period of high interest rates.