Banks have lowered their average lending rates by 1.5 percentage points to 15.4 per cent since December, driven by the Central Bank of Kenya’s efforts to make credit more accessible and support job creation and business growth.

The move comes amid a series of rate cuts by the Central Bank over the past 18 months, with the latest reduction in June lowering the benchmark Central Bank Rate (CBR) to 10 per cent from 10.75 per cent.

The Monetary Policy Committee (MPC) said the decision was aimed at encouraging more borrowing by the private sector to stimulate economic activity. However, while borrowing is becoming cheaper, returns on savings have dropped.

CBK data shows that interest rates on fixed deposits averaged 8.7 per cent in May, the lowest level in ten years, down from 10.45 per cent in December 2024.

CBK’s publication of average interest rates for May revealed Citibank as the lowest-cost lender in the country, offering loans at an average of 10.36 per cent.

This is only 36 basis points above the CBR and reflects a five per cent drop in Citibank’s rates over the last six months. Stanbic Bank followed at 12.92 per cent and Standard Chartered at 13.5 per cent.

On the higher end, Commercial International Bank Kenya is the most expensive lender, charging 20.2 per cent for loan facilities. Access Bank Kenya and Middle East Bank Kenya follow closely, offering credit at 19.98 and 19.87 per cent respectively.

Despite CBK’s rate cuts, concerns have emerged over the slow pace at which banks are passing on these benefits to borrowers.

The Central Bank has attributed this to the current risk-based pricing model, which gives banks discretion to set loan rates based on borrower profiles, a system that has been criticised for lacking transparency and locking out small and medium-sized businesses and borrowers without strong credit records.

In response, CBK is pushing for a shift away from the risk-based model towards a uniform system where all lending rates are pegged to the benchmark rate.

“CBK proposes the use of the policy rate (Central Bank Rate) as the common reference rate for determining lending rates in the Kenyan banking sector,” the regulator stated in a consultative paper.

Under the proposed system, lending rates would be calculated by adding a fixed premium—referred to as “K”—to the CBR. The premium would cover a bank’s operational costs, shareholder returns, and a basic measure of borrower risk.

CBK intends to make the details of these premiums public through its website, the Total Cost of Credit (TCC) portal, and newspapers with national circulation.

The CBK’s push is meant to ensure that all categories of borrowers, especially SMEs and households, benefit equally from lower interest rates.

The regulator is reportedly frustrated by banks’ reluctance to adjust rates downward despite the repeated cuts in the CBR since October 2024.

Introduced in 2019, the risk-based model was initially meant to improve access to credit for high-risk borrowers.

In practice, however, it has resulted in high interest rates, particularly for customers without established credit histories. The CBK hopes that anchoring loan pricing to its policy rate will make borrowing fairer and more predictable across the banking sector.