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High interest rates gift top lenders an extra Sh61bn
I&M Bank plc Regional CEO Kihara Maina makes his remarks during the banks release of the 2024 Financial Results (FY2024) at the Stanley Hotel on March 26, 2025.
Photo credit: Francis Nderitu | Nation Media Group
Top Kenyan banks pocketed an additional Sh61 billion from lending last year, tapping the gains of a high interest rates environment to increase their earning margins even as they countered higher costs to keep customer deposits.
A Business Daily analysis showed that the net income from interest charges by local units of nine tier I banks listed on the Nairobi Securities Exchange (NSE) surged 19.3 percent to Sh376.4 billion in 2024, up from Sh315.4 billion in the previous year.
The total interest income for the banks, including Equity Bank, KCB, Co-operative Bank, NCBA, Standard Chartered, Absa, Stanbic, I&M, and DTB, rose by 23.1 percent to Sh656.3 billion from Sh532.8 billion in 2023, including interest from loans and advances to customers and government securities.
The banks, however, contended with a faster rise in interest-related expenses in 2024 as payouts to customer deposits spiked by 49.3 percent to Sh234.6 billion from Sh157.1 billion as lenders defended the deposits from the competition, including directly purchased Treasury bills and bonds by clients.
The higher net interest income helped the Kenyan units of the nine banks to a 21.9 percent jump in profit after tax for the year ended last December to Sh184 billion from Sh150.9 billion previously, offsetting a slower growth in non-interest income at a slower 3.5 percent.
“Banks leveraged the risk-based pricing model in a high-risk environment to increase their lending margins as well as position themselves in attractive government papers,” Melody Ndanu, a senior banking research associate at Standard Investment Bank said.
“Despite the substantial rise in deposit costs, banks still achieved a double-digit growth in interest income. This demonstrated the bank’s ability to manage spreads effectively, even under pressure from rising funds.”
Average commercial bank lending rates reached a high of 17.22 percent last November from 14.63 percent at the end of 2023 as the Central Bank of Kenya (CBK) raised the benchmark rate from 12.5 percent in January to 13 percent in February before commencing cuts in August. Deposit customers piled pressure on banks to pay out a competitive return on the term holdings, lifting the average commercial bank deposit rate from 10.1 percent in December 2023 to a high of 11.48 percent in June.
I&M Bank Group regional Chief Executive Kihara Maina says banks have had to be calculative in unlocking higher lending margins as rising interest rates squeeze up both interest margin and the cost of deposits.
“When you have a high-interest rate environment, you are going to see pressure from both sides of the balance sheet and margin management is something that every bank must focus on,” he said in a recent interview.
Net interest margins for banks are expected to remain the focus of the industry in 2025 as the risk-off environment gives rise to lower interest rates on lending and customer deposits.
The CBK has continued to signal lower interest rates, having cut its key benchmark rate at its fifth straight policy-setting meeting last week to 10 percent from 10.75 percent. The cuts are expected to spur lending to the private sector by bringing down borrowing costs for consumers.
Banks have, however, failed to translate the policy decision into cheaper loans as interest rates remain high relative to the CBK cuts with 14 commercial banks having been yet to cut borrowing costs as of the end of last February.
Commercial banks have now proposed an overhaul of the risk-based pricing model on which loan rates are based, indicating that the model has been a hurdle to lower interest rates as each bank has a different approved framework.
The Kenya Bankers Association has proposed a new industry benchmark from which to base rates on commercial bank lending derived from the two-month average of the interbank rate.
Banks say the high interest rates on customer deposits have also contributed to the minimal reduction in borrowing costs.
“It’s pretty difficult to do (cut interest rates) when rates are coming down because you have stickiness in your deposits rates having taken deposits which you can’t immediately reprice,” said Mr Maina.
Analysts expect 2025 bank net interest margins to depend on factors, including the loan pricing review and a drop in customer deposit costs. The CBK expects to roll out a new loan-pricing framework before June.
“Lower interest rates may reduce the yields banks earn on loans and advances unless they can maintain strong credit demand or adjust pricing strategies,” said Ms Ndanu.
“With falling rates, banks may see a reduction in deposit costs, which could provide some relief and support net interest margins in the short term. The recent narrowing of the interest rate corridor for interbank lending is anticipated to complement the lowering of the CBR, freeing up liquidity and reducing banks’ reliance on expensive deposits.”
