Commercial banks have continued to fatten their margins by trimming lending rates more cautiously than the returns they pay on deposits. The sector’s average lending margin, the gap between loan and deposit rates, has climbed to 7.48 percent from 5.74 percent in the latter half of 2024, when interest rates were at their highest.
As of January 2026, the average lending rate stood at 14.48 percent, while the average deposit rate was 7.0 percent. Loan rates peaked at 17.22 percent in November 2024, and deposit rates reached 11.48 percent in June that year. Since then, banks have cut lending rates by 2.74 percentage points, but deposit rates have fallen by a steeper 4.5 points.
The push to lower borrowing costs has been central to recent policy moves by the Central Bank of Kenya, aimed at stimulating private sector credit growth. The Monetary Policy Committee has implemented ten straight reductions to the Central Bank Rate, bringing it down to 8.75 percent from 13 percent in August 2024, including a 0.25 percentage point cut this week.
These rate cuts have also reduced banks’ own cost of funds. With diminished competition from government securities such as Treasury bills, whose yields have dropped to below eight percent, lenders have found room to slash deposit returns more aggressively. The regulator is now urging banks to accelerate reductions in lending rates, particularly under the newly introduced risk-based pricing framework anchored on the CBR.
CBK Governor Kamau Thugge noted that banks have been slow to pass on policy rate cuts to borrowers, even after a cumulative 4.25 percentage point reduction. The widening gap between lending and deposit rates, he argued, is precisely what the revised pricing model seeks to correct.
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Under the new framework, banks must benchmark loans against either the Kenya shilling overnight interbank rate, Kesonia, or the CBR, before adding a margin to cover operational costs and profit. Kesonia itself tracks the CBR within a narrow band of plus or minus 0.5 percentage points, enhancing transparency and strengthening monetary policy transmission. New loans have been issued under this model since December 1, 2025, with existing facilities set to migrate fully by the end of this month.
Previously, each lender relied on its own base rate, a system critics said lacked transparency and contributed to costly credit. Should the updated framework succeed in narrowing the lending margin, banks could see pressure on earnings through lower net interest income. In the nine months to September 2025, the top eight lenders, including KCB Bank Kenya and Equity Bank Kenya, expanded their combined margins by Sh24.2 billion to Sh149.7 billion, up from Sh125.5 billion a year earlier, reflecting the gains from trimming deposit rates faster than lending rates.
