The Central Bank of Kenya (CBK) has announced plans to commence on-site inspections of commercial banks to ensure lending rates reflect recent CBK monetary policy adjustments. This move comes amid concerns that high interest rates are stifling credit demand and impeding economic growth.
The inspections, set to begin in the coming weeks, aim to assess compliance with CBK monetary policy stance. The central bank has been actively adjusting interest rates to stabilize inflation and the foreign exchange market, yet lending institutions have been slow to align their borrowing costs with these changes.
CBK’s Monetary Policy Committee (MPC) recently noted a significant slowdown in credit growth due to elevated lending rates. According to data from December, growth in local currency-denominated loans stood at just 2.1%, while foreign currency-denominated loans—comprising approximately 26% of total loans—contracted by 11.4%.
The financial sector has seen a reduced demand for credit, attributed to high lending interest rates. Businesses and individuals are borrowing less, leading to a contraction in foreign currency loans. Kenya’s bank lending rate stood at 16.89% as of February 2025, reflecting the country’s ongoing efforts to ease borrowing costs and stimulate private-sector credit growth.
“The high cost of credit is discouraging borrowing, which in turn is affecting investment and economic expansion,” the MPC report stated. The CBK monetary policy emphasized that while adjustments to the policy rate should naturally translate to changes in commercial lending rates, banks have been hesitant to lower borrowing costs.
The Central Bank of Kenya (CBK), in collaboration with the government, has been implementing measures to bring down lending rates. In November 2024, the CBK cut the Central Bank Rate (CBR) from 12.75% to 12%, a move aimed at making credit more affordable for businesses and individuals.
Following the CBK’s rate cut, some commercial banks have adjusted their interest rates downward. Notably, Equity Bank announced a reduction in interest rates on all new and existing Kenya Shilling-denominated credit facilities, signaling a positive response to the regulator’s monetary policy actions.
The CBK has maintained that lower interest rates are crucial for boosting private-sector lending, which in turn supports economic growth. However, the extent to which banks adjust their lending rates in response to policy changes remains a key factor in determining the effectiveness of these measures.
As Kenya’s financial sector navigates the evolving interest rate environment, businesses and consumers will be closely watching how lending institutions respond to the CBK’s monetary policy shifts.
The government has also been pursuing fiscal consolidation to complement CBK monetary policy efforts. The recently implemented FY2024/25 Supplementary Budget I is expected to lower the fiscal deficit to 4.3% of GDP from 5.3% in the previous financial year. Policymakers believe that sustained fiscal discipline will help reduce Kenya’s debt vulnerabilities and stabilize the financial system.
The CBK maintains that overall inflation is expected to remain within its target range of 2.5% to 7.5%, supported by stable core inflation, lower energy prices, and a relatively stable exchange rate. The global economic environment is also shifting, with major central banks easing their monetary policies at varying paces. This trend could impact Kenya’s foreign exchange market and trade balances.
The upcoming inspections will focus on whether banks are passing on the benefits of CBK’s monetary adjustments to borrowers. Regulators are particularly concerned that commercial banks may be prioritizing profit margins over aligning with the intended effects of monetary policy.
For businesses and individuals, the CBK’s intervention could offer much-needed relief if lending rates are adjusted downwards. Small and medium-sized enterprises (SMEs), which form the backbone of Kenya’s economy, have been disproportionately affected by high interest rates, limiting their capacity to expand and create jobs.
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