(NAIROBI, KENYA) – The gap between what banks in Kenya charge on loans and pay on deposits narrowed to a 10 month low of 7.46 percentage points in July. The trend reflects pressure on lenders to balance lower borrowing costs for customers against the need to keep savers from moving funds to higher yielding options.
Central Bank of Kenya data shows the spread fell from 7.53 percentage points in June and 7.86 points in February, when it hit the highest level in nearly 10 years. The July reading was the narrowest since September last year, when the spread stood at 7.44 percentage points. It was the fifth straight month of narrowing spread, reversing a widening trend recorded between June last year and February this year.
The narrowing spread came as banks raised the average rate paid on deposits while keeping lending rates largely stable. This points to rising competition for customer savings even as lenders respond to Central Bank pressure to offer loans linked to the Central Bank Rate.
The Central Bank and customers have been pushing for lending rates that reflect the reduced benchmark rate. Banks have been cautious about cutting deposit rates too sharply to avoid losing funds to money market funds and equities. The Nairobi Securities Exchange has gained more than 40% this year, making competing investment options more attractive.
Concerns about the mismatch between lending rates and the Central Bank Rate prompted Central Bank Governor Kamau Thugge to intervene through moral suasion and the threat of daily fines to improve rate transmission.
The Central Bank has kept its benchmark rate at 8.75% after cutting it by 75 basis points in February from 9%. The rate has remained unchanged since February as the regulator assesses the impact of earlier policy decisions. The next meeting to decide on the rate is set for 7th October.
The average lending rate rose slightly to 14.39% in July from 14.37% in June. The average deposit rate increased to 6.93% from 6.84% over the same period.
Earlier, the decline in lending rates had been sharper than the movement in deposit rates. The average lending rate fell from 16.64% in January 2025 to 14.39% in July this year, a reduction of 2.25 percentage points. In the same period, the average deposit rate declined from 10.05% to 6.93%, a drop of 3.12 percentage points.
The wider spread recorded earlier in the year was partly caused by deposit rates falling faster than lending rates. The gap peaked at 7.86 percentage points in February before beginning a gradual decline.
The latest data offers some relief to borrowers compared with 2024 levels. The average lending rate reached a recent high of 17.22% in November 2024 as banks adjusted pricing to reflect tighter monetary conditions and higher funding costs.
Lending rates have been softening as the Central Bank shifted towards monetary easing. Last year, the regulator cut the Central Bank Rate six times, building on easing that started in August 2024 when the rate was cut from a nine year high of 13%.
The reduction in lending rates has been accompanied by a gradual recovery in demand for credit after high borrowing costs and economic uncertainty weighed on loan growth.
For savers, the decline in deposit rates means returns on bank deposits have continued to fall from the highs recorded during the period of tight monetary policy. The average deposit rate stood at 11.48% in June 2024 before declining to 8.37% in June last year and 6.93% in July 2026.
Last year, the Central Bank reviewed the risk based pricing framework and established a common base lending rate for all banks based on the overnight interbank lending rate, renamed the Kenya Shilling Overnight Interbank Average, or Kesonia. Kesonia is closely tied to the Central Bank Rate under the interest rate corridor framework, where overnight lending rates between banks are held at no more or less than 0.75% of the benchmark.
The total cost of credit to a borrower equals Kesonia plus a premium known as K, which is set according to the risk profile of each customer. The premium also factors in bank margins and expected returns to shareholders.