The Central Bank of Kenya (CBK) has announced strict penalties for banks that fail to reduce lending rates in response to recent monetary policy adjustments. The regulator has introduced daily fines of up to Sh100, 000 per loan account found in violation and penalties of up to Sh20 million or three times the financial gain for non-compliant institutions.
This move follows CBK’s decision to cut its benchmark interest rate for the fourth consecutive time, reducing it from 11.25% to 10.75%. Additionally, the cash reserve ratio (CRR) has been lowered from 4.25% to 3.25%, freeing up Sh73.7 billion for lending. Despite these measures, private sector credit contracted by 1.4% in December, far below the ideal growth range of 12-15%.
Read: CBK Cuts Lending Rate for Fourth Consecutive Time
To enforce compliance, CBK has commenced on-site inspections to ensure the full implementation of the Risk-Based Credit Pricing Model (RBCPM). Under recent amendments to the Banking Act, banks that fail to align their lending rates with reduced funding costs will face regulatory penalties.
Delayed Response from Banks
The CBK’s latest actions stem from concerns that many banks have been slow to pass on the benefits of rate cuts to borrowers. Since August 2024, only four banks—Citibank NA Kenya, Standard Chartered Bank of Kenya, Victoria Commercial Bank, and Stanbic Bank Kenya—have reduced their lending rates by at least 1.75 percentage points. High lending rates have contributed to a rise in non-performing loans, which stood at 16.4% in December, a marginal improvement from 16.7% in September.
CBK’s Monetary Policy and Its Impact
As Kenya’s monetary authority, the CBK is responsible for managing inflation and promoting economic growth. One of its key tools is the Central Bank Rate (CBR), which influences the cost of borrowing for commercial banks. A reduction in the CBR is meant to lower borrowing costs for businesses and individuals, encouraging economic activity.
However, despite successive CBR cuts, some banks have maintained high lending rates, citing concerns over profitability margins and potential loan defaults. Governor Kamau Thugge has emphasized that banks are expected to adjust their rates accordingly, as part of CBK’s broader strategy to reduce the cost of credit in Kenya.
Read: CBK Moves to Regulate Hire Purchase Interest Rates
The CBK has begun monitoring lending rate adjustments, assessing factors such as the spread between deposit and lending rates and overall credit growth. The aim is to ensure banks do not selectively lower rates for a few clients while keeping high rates for others.
Lower lending rates are expected to boost borrowing, particularly among businesses seeking expansion and investment. This could stimulate economic growth, create jobs, and increase consumer spending.