CBK cuts lending rate to 10.75pc to boost private sector credit

The Central Bank of Kenya (CBK) has cut the base lending rate by half a percentage point to 10.75 percent and reduced the cash holdings requirement for banks by a similar margin to 3.25 percent in order to boost lending to the private sector.

The CBK’s move to cut the cash reserve ratio (CRR) is expected to free up to Sh57 billion in additional liquidity that banks can then lend to the private sector. The CRR represents the percentage of deposits that banks are required keep at the CBK as reserves.

The ratio was last revised at the onset of the Covid pandemic in Kenya in March 2020— from 5.25 percent to 4.25 percent— in a proactive move which was meant to give banks additional liquidity to support borrowers who would be financially distressed by the pandemic.

In making the latest cut on the CRR, the CBK said that despite cutting the base rate thrice between August and December 2024, lending rates have only declined marginally. Private sector credit also contracted by 1.4 percent in the 12-months to December, calling for stronger measures to lower the cost of borrowing and increase liquidity for banks to lend.

“The committee noted that economic growth decelerated in 2024, and therefore there was scope for a further easing of the monetary policy stance to support economic activity, while ensuring exchange rate stability,” said the CBK in a statement.

“The reduction in the CRR will release additional liquidity to banks. This is expected to lower the cost of funds and lending rates, and support growth of credit to the private sector.”

Further, the CBK announced that it has started on-site inspections of banks to ensure that they are implementing the Risk-Based Credit Pricing Model (RBCPM) for borrowers, and reducing their interest rates in line with this model.

The slowdown in lending to the private sector has been caused by a mix of factors, including high interest rates that have made loans expensive and unaffordable for borrowers, as well as cautious lending by banks due to the elevated volumes of bad loans in a difficult economic environment.

The ratio of non-performing loans to gross loans in the banking sector remained high at 16.4 percent in December 2024, compared to 16.5 percent in October, and 16.7 percent in September.

The CBK considers private sector credit growth of at least 12 to 15 percent as optimum to power healthy growth of the economy—giving enterprises and businesses sufficient capital to make new investments and grow jobs.