Why banks are in the spot over expensive loans

When Kenya Bankers Association (KBA) Chief Finance Officer Kennedy Mutisya presented the innovative idea on how the government could pay VAT refunds using bonds to President William Ruto recently, he did not anticipate what would come next.

While President Ruto welcomed the idea, which has been used to handle pending bills in the roads sector, he shifted the spotlight to Mutisya, tasking him to explain why banks are sluggish to bring down interest rates.

The President sought to understand why the government is offering an average of eight per cent on Treasury bills, yet banks are not willing to lower their lending rates to this level.

The latest data published by the Central Bank of Kenya (CBK) shows the lending rate, as at June 2025, stood at 15.28 per cent.

The Central Bank Rate (CBR) is currently at 9.75 per cent, the 91-day T-Bill at 8.08 per cent, and the Kenya Bankers Reference Rate is at 8.9 per cent.

Inflation at the time stood at 3.8 per cent, which has since hiked to 4.3 per cent.

According to the president, these numbers should ensure Kenyans can access credit at a lower rate, yet, this is not the case. He said his administration is facing an economy of where the macros are not necessarily translating to the micros.

“The question I am sure everyone wants you to answer is; T-Bill rates have come down from 16 per cent to eight per cent last week. When are you going to bring down the interest rate to reflect this decline?” he posed.

President Ruto said his administration has taken responsibility to scale down what the government is borrowing, therefore, the rates offered on T-Bills and bonds has helped reduce crowding of the private sector in the market.

“That was my primary reason,” he said.

But Mutisya acknowledged the slow reduction of rates by banks terming it the primary reason why CBK and banks are discussing on the risk-based credit pricing model framework which should solve this challenge.

He explained that the current regime where different banks have different frameworks is the reason for the slow retreat despite actions by CBK to lower the CBR.

Different frameworks

“Banks have essentially been reducing rates in line with the T-Bills but not as fast as expected. With the new unified framework, the expectation is that as soon as the CBR, through the CBK, is adjusted, Kenyans and borrowers will start seeing immediate transmission, and reduction of their rates,” he said.

Mutisya noted that there has been a gradual reduction on the average lending rates, and this is in line with the movement of the CBR adjustment.

“Hopefully, with this unified framework, once it is in place, I am sure we will see faster reduction,” he said.

President Ruto said he did ask CBK to engage with banks to find out why they do not lower their rates even when other indicators suggest they should do so.

“I am happy there is a conversation between you, the banking industry and the CBK, and you have agreed on a unified way of pricing, that can easily be translated whenever there is movement either way in the industry,” he said.

When asked to explain why the average lending rate is at 15.28 per cent, Mutisya explained that it caters for the margins of operating costs and profit of the shareholders, an explanation that the president did not buy.

"In your opinion, what should be the gap, if at all, between the CBR rate and average lending rate by the banks?" questioned President Ruto.

"There should be a differential to cater for operating costs, as well as shareholders’ return. There should be a reasonable spread perhaps between five to a maximum of upto eight per cent," Mutisya responded. 

"No…no…no. That is unjustified. The global practice is two or three per cent. How does it become five, six, seven per cent. I don’t want to put more pressure on you. Let us leave it there," Ruto quickly interjected.

The President went on to insist that his administration expects to see a more responsive financial sector; one that not only looks at the interest of shareholders but also the borrowers.

“There will be no shareholders without borrowers. It has to be mutually beneficial,” he said.

Investments, Trade and Industry Cabinet Secretary Lee Kinyanjui chimed in saying the discussion for commercial banks to bring down the lending rates is imperative, adding that the financial institutions will benefit more if they lend to more people than a few.

“And that will make the economy grow faster and we will be able to have cash in the economy. And that is why there is a big disconnect between the numbers presented and the available cash in the economy,” he said.

Banks have always come under fire by both the regulator and customers for being slow to reduce the rates when the CBR is revised downwards, but quick when it is raised.

In February, CBK Governor Dr Kamau Thugge had to threaten banks with daily fines for them to warm up to the reduced CBR rate. CBK had even revised the cash reserve ratio (CRR) from 4.25 per cent to 3.25 per cent to inject more liquidity to the banks which should facilitate more lending.

However, despite this move, and a revision of the CBR to 10.75 per cent from 11.25 per cent, banks were still reluctant to lower their guard.

President Ruto warned that with the direction his administration is taking, banks need to warm up to lending to the private sector and not to government. He said he is devising more innovative ways to utilise public funds away from borrowing through Treasury bonds and bills.

“Just so you know, we will be doing less of borrowing with Treasury bills and bonds. In fact, I am looking for ways of settling some of the bonds that we have. Prepare yourself to lend more to Kenyans and less to me as government,” he said.

He noted that the government will be doing more of public private partnerships (PPPs), referencing to the Mau-Summit highway and the standard gauge railway extension from Naivasha through Kisumu to Malaba, as some of the projects in the pipeline that will be carried out with zero borrowed funds.

“We will be using more of the capital markets to raise money to fund public projects and meet public needs away from borrowing from the banks,” he said. “Please, start to think of lending to small people, industries, and manufacturers. I am just giving you a heads up.”