Two weeks after the Central Bank of Kenya cut its base lending rate to 13%, more than 12 banks have followed suit and lowered their rates by different margins. The news for lower lending rates is welcome for borrowers as they will be relieved from the high interest rates they have been subjected to in the last few months.

In the same wake, Kenya Bankers Association (KBA) Chief Executive Habil Olaka released a statement saying the industry has responded well to Central Bank of Kenya's move and more banks are expected to lower their rates. CBK lowered the base lending rate to 13% in earlier this month down from 16.5% in July owing to dropping rates of inflation currently at 6.09%.

"In response to the call for banks to lower lending rates, I would like to note that actually banks have taken action. So far more than 12 banks, including the majority of the large banks, have made public announcements on base rate reductions, while others have not gone public but are affording their customers reduced rates." Olaka said  "We are expecting banks to continue with this trend as the macroeconomic environment improves."

Olaka added that KBA has made an effort to educate banking industry stakeholders about the fact that generally there is a lag between the movement in the Central Bank Rate (CBR) and the banks’ response. He added that this is because the lower CBR affects the market, enabling banks to pick cheaper deposits from which they will then loan to customers (at a lower rate).

Competitive edge

To gain a competitive advantage, Olaka says, some banks will lower their lending rates faster  -- even before their deposit rates drop; while others would wait for their cost of funds (deposit rates) to drop before they transmit it through reduced lending rates.

"We all would like to see cheaper loan rates, particularly if the credit is directed towards productive sectors of the economy. We welcome the signal by the Monetary Policy Committee with the caution that fiscal and monetary policy alignment should continue as we seek to win the inflation war; gain a stable exchange rate cushioned by adequate foreign reserves; and lower interest rates to spur economic growth." He said.

Olaka said that Kenya Bankers Association will continue to work with the Regulator and its members (banks and MFIs) to address the other areas that affect the cost of loans in the market.