The average lending rates by commercial banks fell for the first time in nearly two years, signalling incoming relief for borrowers who have contended with expensive loan costs over the last year.
New data from the Central Bank of Kenya (CBK) shows that the average commercial bank lending rate fell to 16.84 percent in July from 16.85 percent in June, the first monthly drop since October 2022.
Banks charge different interest rates on different types of loans, with the riskiest borrowers saddled with rates topping the 25 percent mark.
The slight drop in the average lending rate points to a likely peak in the cost of borrowing in the country after a prolonged elevation in the lending rates, primarily driven by the CBK's action to raise benchmark rates to cool inflation and support the local currency.
Absa Bank Kenya's Chief Executive Abdi Mohamed noted that CBK's action has resulted in stability in the cost of living and the exchange rate, creating conditions that are now supportive of lower borrowing costs.
“There are a lot of reasons including the macroeconomic environment locally, including the stability we see in the foreign exchange market that indicates potentially, a reduction (in interest rates) as the direction of travel. The CBK Governor in his communication with the industry has already indicated that direction,” he said.
The fall in lending rates will be welcome for millions of borrowers who are already squeezed by high loan payments resulting in default rates which peaked at a near two-decade high of 16.3 percent in June.
For commercial banks, while lower interest rates may mean reduced interest margins, cheaper borrowing costs are expected to reignite the demand for credit while helping drive down loan impairments for the industry.
Samuel Tiriongo, Head of Research at the Kenya Bankers Association observed that strong expectations on interest rate cuts along with competition among banks had resulted in the softening of borrowing costs.
“Strong expectations of rate cuts in the coming months amidst heightened competition for consumers and the slowdown in lending to the government can trigger the fall in borrowing costs,” he said.
Private sector lending growth slumped to just four percent in June in a signal of weakened demand for credit even as part of the slowdown is attributed to the revaluation of foreign currency-denominated loans.
The CBK has, however noted pockets of strong demand for credit in the economy despite the high interest rate environment supported mostly by businesses seeking access to working capital.
“In the second quarter of 2024, the perceived demand for credit remained unchanged in nine economic sectors but it increased in trade and personal and household sectors. The perceived increased demand for credit is mainly attributed to an increase in interest costs, increased cost of doing business, and increased demand to finance goods,” the CBK notes in its latest credit survey.
The CBK was on an interest rate-increasing drive throughout 2023 as it sought to quash high inflation rates and steady the exchange rate as the shilling came under pressure from capital outflows and speculation around Kenya’s debt vulnerabilities. The CBK monetary policy team, for instance, raised its indicative lending rate from 9.5 percent in May 2023 to a high of 13 percent in February this year before reducing it to 12.75 percent in August.
The raising of the rate, which is also referred to as tightening monetary policy, had the desired effect as inflation dropped to a multi-year low of 4.3 percent in July while the shilling has stabilised to trade at a narrow range of Sh129 to Sh133 against the US dollar in recent weeks.
The high domestic interest rates including returns on government securities have, for instance, supported new inflows from foreigners who have taken advantage of the interest-rate differential — the difference between returns in Kenya and advanced economies.
Expected interest rate cuts in the US will further incentivise similar moves by the CBK. The banking industry sees lower domestic interest rates as welcome for not just lenders but also clients.
“Reduced interest rates have a benefit for the industry. We will be able to lend more to our customers, private sector credit will grow and this has a positive impact on our non-performing loans.” Mr Mohamed added.
Other interest rates similarly softened in July with the deposit rate --the return paid by banks for long-term customer deposits-- falling to 11.28 percent to mark the first drop in 16 months.
The savings rate which is paid to short-term depositors has meanwhile fallen for the first time in five months to 4.56 percent after peaking at 5.11 percent in June.
Interest rates on Treasury bills have also been on the decline with yields on all three papers (91-day, 182-day, and 354-day instruments) falling for four straight weeks.
