Equity Bank has announced a 300 basis point (3 percent) reduction in interest rates for all new and existing Kenya Shilling-denominated credit facilities, a move expected to provide relief to borrowers and stimulate economic growth.

The rate reduction, which takes effect on February 13, 2025, for new loans and March 1, 2025, for existing loans, comes in response to the Central Bank of Kenya’s (CBK) recent decision to lower the Central Bank Rate (CBR) by 50 basis points to 10.75 percent.

This marks the third time in six months that Equity Bank has reduced its lending rates, following previous cuts in September and November 2024.

According to Moses Nyabanda, Managing Director of Equity Bank, the move is aimed at easing financial burdens on Kenyans and improving access to credit.

“We understand the financial pressures facing Kenyans today, and we’re committed to doing our part to ease that burden. This rate cut is about more than just lower interest rates; it’s about opening doors for Kenyans to invest in their businesses, support their families, and secure their livelihoods.”

With this latest adjustment, Equity Bank’s revised reference rate (Equity Bank Reference Rate – EBRR) stands at 14.39 percent, plus a margin based on individual customers’ risk profiles.

Equity joins a growing list of leading financial institutions, including Kenya Commercial Bank (KCB) and Co-operative Bank, in complying with CBK’s directive to cut lending rates, a trend that is expected to continue across the banking sector.

Understanding Kenya’s Monetary Policy Shift

The Central Bank of Kenya’s (CBK) recent decision to lower the Central Bank Rate (CBR) and Cash Reserve Ratio (CRR) reflects a broader strategy aimed at stimulating economic activity in the wake of sluggish growth and tightened financial conditions.

CBK’s decision to lower the Cash Reserve Ratio (CRR) for banks to 3.25 percent is particularly significant, as it is expected to release an estimated Sh57 billion into the banking system, making more funds available for lending.

This move follows a series of rate cuts implemented in late 2024, signaling CBK’s commitment to supporting businesses and households amid ongoing economic challenges.

But what does this mean for Kenya’s economy, borrowers, and financial institutions?

How Will Lower Interest Rates Affect Borrowers and Businesses?

1. Easier Access to Credit

With lower interest rates, businesses and individuals will find it cheaper to borrow money, making it more attractive to take out loans for investment, business expansion, or personal financial needs.

This is particularly important for small and medium-sized enterprises (SMEs), which are often constrained by high borrowing costs.

Lower lending rates could enable SMEs to:

• Expand operations
• Hire more employees
• Purchase new equipment
• Boost productivity

In the long run, this could enhance economic growth, create jobs, and drive innovation in various sectors.

2. Boost to Consumer Spending

For consumers, lower interest rates mean lower monthly loan repayments, leaving them with more disposable income. This could lead to increased spending on goods and services, benefiting industries such as retail, real estate, and hospitality.

With household budgets under strain due to inflation and high living costs, the rate cut comes as a much-needed relief.

3. Lower Mortgage and Auto Loan Costs

One of the most direct beneficiaries of interest rate cuts is the housing sector.

Mortgage borrowers will see:

• Lower monthly repayments
• Higher affordability for first-time homebuyers
• More demand for real estate investments

Similarly, those looking to finance car purchases through loans will find that auto loans become more affordable, potentially boosting the local automotive market.

Potential Challenges: Are Banks at Risk?

While lower interest rates benefit borrowers, they pose challenges for banks and financial institutions.

1. Reduced Profit Margins

Banks make most of their money from the interest spread—the difference between the interest they charge borrowers and what they pay depositors.

With interest rates dropping, banks will earn less on their loans, potentially leading to lower profits.

2. Increased Credit Risk

As banks expand lending in response to lower interest rates, they may be exposed to higher credit risk if borrowers struggle to repay loans.

Financial institutions must therefore ensure stringent credit assessment measures to prevent:

• A surge in loan defaults
• Higher non-performing loans (NPLs)
• A potential banking crisis

3. Pressure on Fixed-Income Investments

Lower interest rates also impact fixed-income investments such as government bonds, which banks rely on for stable returns.

As yields decline, banks may need to:

• Look for alternative revenue streams
• Diversify their portfolios
• Reassess their investment strategies

A Historical Perspective: How Do Kenya’s Current Interest Rates Compare?

Kenya has historically struggled with high-interest rates, making it difficult for businesses and individuals to access affordable credit. In 2016, the government introduced an interest rate cap, limiting bank lending rates to 4 percentage points above the Central Bank Rate (CBR).

However, the cap was repealed in 2019, allowing banks to set their own interest rates based on customer risk profiles. Since then, lending rates have remained relatively high, hovering around 13% to 15% for most borrowers. The recent monetary policy easing by CBK represents one of the most significant efforts in years to lower borrowing costs and boost economic activity.

How Will Other Banks Respond?

Equity Bank’s decision to cut lending rates is expected to trigger a wider trend in the financial sector.

Already, major lenders such as:

• Kenya Commercial Bank (KCB)
• Co-operative Bank

…have announced similar rate reductions, aligning with CBK’s directive.

More banks are likely to follow suit in the coming weeks, creating a more competitive lending environment.

This could further drive down borrowing costs, making loans even more affordable for businesses and households.

Broader Economic Outlook: Will Kenya’s Economy Benefit?

The rate cuts and increased liquidity from CBK’s reduction of the CRR come at a time when Kenya is facing economic headwinds, including:

• High inflation rates
• Weakened shilling against the U.S. dollar
• Rising fuel and food prices
• Declining foreign direct investment (FDI)

While the monetary policy easing aims to support economic growth, there are concerns that lower rates could lead to increased inflationary pressures.

CBK will need to strike a delicate balance between:

• Stimulating economic activity
• Keeping inflation under control
• Ensuring financial sector stability

Conclusion: A New Era of Affordable Credit?

Equity Bank’s decision to lower lending rates by 3% is a positive development for borrowers and businesses alike.

As more banks follow suit, Kenya could enter a new era of more affordable credit, boosting:

• Economic growth
• Consumer spending
• Investment across key sectors

However, challenges remain, and both banks and policymakers must navigate the risks associated with lower profit margins, increased credit risk, and inflationary concerns.

With CBK leading the way with strategic monetary policies, Kenya’s financial sector is poised for a dynamic shift, one that could ultimately benefit millions of Kenyans seeking financial stability and economic opportunity.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

13th February, 2025