The Central Bank of Kenya (CBK) has warned commercial banks against keeping lending rates high despite the recent reduction of the Central Bank Rate (CBR) to 10.75 per cent.
CBK Governor Kamau Thugge told the National Assembly Finance Committee that onsite inspections are underway to ensure banks lower their rates in line with reduced borrowing costs.
“We are conducting onsite inspections to determine if the cost of funds for banks has gone down. If it has, then we expect lending rates to follow suit,” Thugge said.
He warned that banks failing to comply will face penalties amounting to three times their unjust gains, as provided under the Business Laws (Amendment) Act.
Thugge also attributed high lending rates to increased government borrowing, which he said had risen from below Sh400 billion to Sh584 billion, making banks prefer lending to the state over private businesses.
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“If banks have a choice between lending to the government, which does not default, and lending to the private sector, which has elevated non-performing loans, it’s an easy decision for them,” he noted.
He further opposed reintroducing interest rate caps, warning that they would lead to credit rationing, particularly for small and medium enterprises.
He revealed that CBK is finalising a risk-based pricing model for loans, set to be completed in two weeks, to improve interest rate transmission.
Members of Parliament expressed significant concern regarding the slow transmission of CBR reductions to commercial lending rates, demanding legislative measures to ensure banks pass on these benefits.
They highlighted the adverse effects of high interest rates on the private sector, particularly SMEs, and the impact of government domestic borrowing on these rates.
They urged stronger protections for the private sector and sought legal interventions to mandate interest rate reductions.
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