Kenya’s banking industry is gearing up to reduce lending rates in a move to tackle the persistent challenges of high borrowing costs, as announced by the Kenya Bankers Association (KBA).

This development follows recent cuts to the Central Bank Rate (CBR) by the Central Bank of Kenya (CBK), which directly influences credit pricing in the market.

According to KBA, individual banks will begin implementing rate reductions from December 2024, with further adjustments expected over time.

The adjustments, however, will depend on evolving monetary policies and credit risk considerations.

Despite the promise of lower rates, banks have acknowledged the complexity of the process due to the enduring high cost of deposits tied to previously elevated interest rates.

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John Gachora, Chairman of KBA and Group Managing Director of NCBA, highlighted the delicate balance banks must maintain.

“The business of banking involves mobilizing deposits and extending loans from the pool of deposits. We will continue to progressively reduce the loan interest rates balancing against the prolonged high cost of customers' deposits that were locked-in during a period of higher interest rates before the Central Bank of Kenya initiated interest rate cuts,” he said.

Kenyan banks are also navigating a shift to risk-based credit pricing, a system that aligns loan costs with individual risk profiles.

Under this model, a bank’s base rate, shaped by the CBR and government borrowing costs, combines with a risk premium reflecting market realities such as non-performing loans and borrower challenges.

These measures come at a time when borrowers are facing mounting financial strains.

KBA has acknowledged the impact of increased living and business costs, delayed payments to businesses, and declining consumer demand due to reduced disposable incomes.

These factors have elevated consumer risks, further complicating efforts to lower interest rates.

KBA emphasised its commitment to unlocking affordable credit.

“We acknowledge that many borrowers continue to face financial strains driven by the increased cost of living and of doing business; the protracted challenge of delayed payments to businesses; and generally low business activity due to reduced consumer demand arising from reduced disposable incomes,” Gachora noted.

To address these challenges, KBA said it is collaborating with the government and other stakeholders to address systemic obstacles to credit growth.

Key focus areas include revising risk-based pricing models, expediting the resolution of delayed payments, and tackling the backlog of commercial litigation.

As the financial sector seeks to balance accessibility with sustainability, the industry is under pressure to demonstrate tangible outcomes from these measures.

For Kenyans, the question remains whether these steps will translate into meaningful relief in a climate of economic uncertainty.