The Central Bank of Kenya (CBK) has intensified its efforts to ensure that commercial banks pass on the benefits of reduced lending rates to borrowers. CBK Governor Kamau Thugge announced that banks failing to adjust their interest rates in line with the CBK’s benchmark rate reductions will face stringent penalties.
To enforce compliance, the CBK has initiated on-site inspections to verify that banks are implementing the Risk-Based Credit Pricing Model (RBCPM). This model is designed to align lending rates with the banks’ cost of funds, ensuring that borrowers benefit from reduced borrowing costs. Governor Thugge emphasized that banks found to be profiting unfairly by not lowering their rates will be penalized.
The penalties for non-compliance are substantial. Institutions that fail to reduce their lending rates accordingly may face fines of up to Sh20 million or three times the amount of unjust gains, as stipulated under the Business Laws (Amendment) Act. Additionally, daily penalties of up to Sh100,000 per loan account could be imposed on banks that persist in non-compliance.
This regulatory action follows a series of reductions in the Central Bank Rate (CBR), which has been lowered from 12.75% in August 2024 to 10.75% recently. Despite these cuts, many banks have been slow to decrease their lending rates, with some still charging as high as 21%. Governor Thugge highlighted that while banks are quick to raise lending rates when the CBR increases, they are often sluggish in reducing them when the base rate is lowered.
The CBK’s measures aim to stimulate economic growth by making credit more accessible and affordable for businesses and individuals. Lower lending rates are expected to encourage borrowing, leading to increased investment and consumption, which are vital for economic expansion. The central bank’s proactive stance underscores its commitment to ensuring that monetary policy decisions translate into tangible benefits for the economy.
