Banks ordered to cut interest rates


The Central Bank of Kenya has handed borrowers a lifeline after it directed banks to freeze all the planned interest rate increases.

Central Bank Governor Patrick Njoroge Thursday told banks to instead reduce their interest rates on loans in line with the current market situation.

Appearing before the National Assembly Finance committee Thursday, Dr Njoroge said he had directed banks to withdraw the notices they sent to their customers, informing them of plans to raise their lending rates, which were to go up this month. He said the move was no longer warranted.

“This week we have been in touch with commercial banks and they understand that interest rates have gone down,” he told the MPs.

“They know our objective of executing a soft landing for rates and they have indicated they will be communicating to their borrowers indicating that they will lower the rates, or at a minimum, withdraw the notices for higher rates issued recently.”

Last month, banks gave borrowers 30-day notices indicating their intention to increase lending rates.

Some borrowers would have had to pay loan interest rates of as much as 30 per cent largely on account of the high cost of money driven by increasing government borrowing.

In the last two months, the government’s growing appetite for debt saw the interest rate on short-term borrowing papers rise to highs of 22 per cent.

On October 22, the 91-day Treasury Bill peaked at 22.5 per cent, with the rate at which banks were borrowing from each other hitting 25.84 per cent.

Last week, the government reduced its appetite for borrowing, rejecting about Sh106 billion in subscription for short-term loans, in effect sending rates on a free fall.

The interbank rate — which banks use to lend to each other — went down to a single digit in weeks, declining to 9.3 per cent.

The return on Treasury bills also declined, with the 91-day Treasury bill rate falling to 13.8 per cent last week.

“The government securities markets have turned the corner and they are signalling a time of lower rates,” said Dr Njoroge.


Central Bank has communicated its expectations that just as interest rates were quick to go up, they should similarly go down.

Lenders were however quick to dig in, with their lobby group indicating that the industry might ignore the directive and keep the rates high.

Kenya Bankers Association chief executive Habil Olaka told the Daily Nation that borrowers will have to bear with huge interest rates on loans for longer before the market adjusts to the downward trend of the T-Bill rates.

“You can see that even as the T-Bill rates went down the cost of deposits did not respond immediately,” said Mr Olaka.

The association has been accused of perpetuating cartel-like behaviour among banks, with the Competition Authority of Kenya investigating their anti-competitive behaviour based on how the lobby is run.

On Thursday, Dr Njoroge also admitted that the economy was slow in adapting to market indicators.

He cited the time it took for the increase in Central Bank Rate to have an effect on the market.

“The transmission is a bit cranky, it is not very smooth. It is like driving a car which has a miss, and obviously we would want a much smoother ride. When we tightened, it took a while,” he said.

According to the latest data from the Central Bank, which were tabled before the committee yesterday, corporate loans have gone up from 14.6 per cent to 16.1 per cent between June 15 and October 15.


Business loans have gone up from 16.6 to 17.5 per cent while personal loans jumped from 16.5 to 17.1 per cent during the same period.

Banks raised their rates recently to reflect the Central Bank Rate, which was raised to 11.5 per cent in July.

Central Bank is set to review the Kenya Banks Reference Rates, the benchmark for lending out money, in January, which will factor in the 91 day T-Bill yields for two months.

During Thursday’s proceedings, nominated MP Oburu Oginga called for a change in law to cap interest rates.

However, the Central Bank governor said such a move would be detrimental in a free market economy.

And speaking when he met Kenya Private Sector Alliance officials, National Treasury Cabinet Secretary Henry Rotich also said that the government expects banks to lower their lending rates.