Why Kenyan Banks Push CBK to Cut Lending Rates More

Kenya Bankers Association Advocates for Central Bank Rate Cut

The Kenya Bankers Association (KBA) is urging the Central Bank of Kenya (CBK) to reduce the Central Bank Rate (CBR) during its upcoming Monetary Policy Committee (MPC) meeting, which is set for August 12, 2025. This call comes as part of a broader effort to stimulate credit growth and support economic recovery.

In a recent research note published by the Centre for Research on Financial Markets and Policy, KBA highlighted several economic indicators that suggest a case for monetary easing. These include stable inflation, a resilient exchange rate, and a decline in global interest rates. The note emphasized that both inflation and inflation expectations remain within the target range, providing a solid foundation for potential rate cuts.

KBA believes that reducing the CBR could help support credit growth and anchor economic development. The association also pointed out that this move would complement ongoing efforts to address long-standing issues with government pending bills, which are expected to improve non-performing loans (NPLs) ratios in the market.

Despite some resilience in the economy, KBA noted that growth remains fragile and requires stronger policy support. The association also highlighted weak credit growth, which has persisted even after recent reductions in lending rates. Businesses have adopted a cautious approach, contributing to the slow pace of recovery.

“Credit growth recovery is yet to pick up despite notable reductions in lending rates, largely reflecting protracted delay in asset quality improvement and credit consumers taking a wait-and-see attitude on investments in anticipation of lower interest rates in the near to medium term,” the research note stated.

With weak credit growth and slowing business activity, the Centre notes that there is room to cut the Central Bank Rate to support lending and stimulate economic recovery.

Economic Indicators and Challenges

In May 2025, credit to the private sector grew by 2.0%, up from 0.4% in April 2025 and -2.9% in January 2025. This growth reflects the impact of declining lending rates, with the average commercial bank lending rate easing to 15.4% in May 2025, down from 15.7% in April 2025 and 17.2% in November 2024.

From a policy perspective, the average interbank rate continued to fluctuate within its defined policy corridor but generally mirrored a decline from 11.06% on January 2, 2025, to 9.6% by August 1, 2025.

However, the sector’s asset quality deteriorated further, with the NPL ratio increasing to 17.6% in April 2025. This was primarily driven by the real estate, trade, manufacturing, and personal lending segments.

“While banks remain adequately capitalized and liquid, lending activity remains subdued due to weak borrower creditworthiness and tepid demand, pointing to structural frictions impeding the transmission of lower interest rates to increased credit uptake,” KBA noted.

Path Forward

A resolution of the NPL problem through initiatives like the planned securitization of bills in the construction sector could support a faster recovery in private sector credit. This, in turn, could lead to a stronger rebound of the broad money supply in the economy towards its long-term mean growth.

As the economy continues to navigate these challenges, the KBA’s call for a rate cut underscores the need for coordinated efforts between policymakers and financial institutions to foster sustainable growth and stability.