Equity Bank has announced a reduction in interest rates on both new and existing Kenya Shilling-denominated credit facilities, in line with an earlier pledge offering relief for borrowers.

The move comes even as other leading lenders remain slow to respond to calls by the Kenya Kwanza administration to cut their interest rates frustrating regulators and Ruto government officials amid an economic slowdown linked to the ongoing credit crunch.

This move follows the Central Bank of Kenya's (CBK) decision to lower the Central Bank Rate (CBR) from 12.75 per cent to 12.0 per cent to stimulate credit to the economy. 

Yesterday, Equity Bank said effective November 18, 2024, it has cut loan charges to make credit more affordable and accessible. This marks the second time in three months that Equity Bank has adjusted its lending rates, with a previous reduction occurring in September this year.

The new interest structure will see the Equity Bank Reference Rate (EBRR) decrease from 17.83 per cent to 17.39 per cent which is then combined with a maximum margin of 8.5 per cent per annum.

“With this reduction, all new and existing customers with Kenya Shilling-denominated loans will benefit from lower borrowing costs, providing immediate relief and supporting their financial aspirations,” said Equity Group Chief Executive Officer James Mwangi in a statement.

Mr Mwangi had earlier promised to effect the cut during the release of the bank's financial results for the third quarter of 2024 at an investor briefing last week. He at the time emphasised that the reduction aligns with the CBK's objective to maintain economic stability amid improving inflation trends and favourable economic indicators. 

Pressure has been mounting on commercial banks to lower interest rates, but many lenders had by press time yesterday maintained higher rates sparking concern from President Ruto and CBK Governor Kamau Thugge. 

The move by Equity Bank, along with pressure from the CBK and government, could lead to a more significant reduction in lending rates by additional banks potentially benefiting Kenyan borrowers and fostering economic activity, analysts said.

The CBK’s MPC recently cut the Central Bank Rate (CBR) from 12.75 per cent to 12.00 per cent aiming to bolster economic activity amid declining inflation.

This followed another reduction of the CBR in August from 13.00 per cent to 12.75 per cent, as the CBK hopes to foster growth amidst a backdrop of declining inflation and a revised growth forecast.

However, banks except a few major banks like Equity Group have been slow to pass these rate cuts onto borrowers, citing concerns over rising funding costs and the quality of their loan portfolios.

The tightening of lending standards by banks is having a negative impact on the economy, as businesses and households are finding it more difficult to access credit.

This is leading to a further slowdown in economic growth and a rise in unemployment dealing a blow for government efforts to boost liquidity and access to capital for individuals and businesses.

Equity joins NCBA Bank, which was the first to respond to the latest CBR cut by reducing interest rates on loans.

Equity Bank in September had reduced its Reference Rate from 18.24 per cent to 17.83 per cent, a move aimed at stimulating credit uptake amid a challenging economic landscape.

Amid the CBR reduction, lending to the private sector has sharply declined, with growth falling from 3.7per cent in July to just 1.3 per cent in August.

This contraction is largely attributed to an increase in NPLs, which rose to 16.7 per cent of gross loans in August, up from 16.3 per cent the previous month.

Historically, Kenyan banks have been quick to raise rates whenever the CBK increases the benchmark rate, often citing rising costs of funds as justification.

This pattern has raised expectations that they would be equally responsive in lowering rates following the recent cut but banks have been reluctant.

“I would like to strongly urge the banks to lower their lending rates as soon as possible. This will be a win win for both consumers, investors as well as the banks as it would stimulate economic growth by boosting credit to the private sector while at the same time addressing the rising non-performing loans of banks,” said Thuge recently.

“With inflation declining steadily and expected to decline and the CBK easing monetary policy there is absolutely no reason not to have lower interest rates by the commercial banks.” 

 Thugge revealed in a meeting attended by several bank CEOs as well as President Ruto he has gathered bank CEOs to address the loan rates.  

Thugge had expressed concern about the tightening of lending standards by banks, arguing it negatively impacts economic growth by hindering access to credit for businesses and households.

He stated, "There's absolutely no reason not to have lower interest rates by the commercial banks" with declining inflation and a more relaxed monetary policy stance by the CBK.

“Your Excellency, we have agreed with commercial banks that we will be having a meeting just to brainstorm on how to ensure that with the lower inflation and the lower CBR they also extend lower interest rates to borrowers.” 

The Kenya Bankers Association (KBA) has countered that banks have already begun lowering rates, although the impact may not be fully reflected in weighted average interest rates yet.

However, a recent CBK survey suggests a cautious approach by banks, prioritizing existing relationships with larger clients while limiting credit access for small and medium enterprises (SMEs).

Newly appointed National Treasury Cabinet Secretary John Mbadi sees lower interest rates as a key driver for increased economic liquidity. This could stimulate growth across various sectors, especially as SMEs gain greater access to credit.

Mwangi urged the CBK - whose Monetary Policy Committee making organ will meet next month on December -5 to lower the benchmark rate again later this year to further stimulate borrowing.

“We hope to see further reductions in the benchmark rate before the end of the year to stimulate credit uptake." By Brian Ngugi, The Standard