The Central Bank of Kenya (CBK) has announced that it will start penalizing commercial banks keeping cost of loans high despite the CBK cutting down its lending benchmark rate.

This has been revealed by the CBK Governor Kamau Thugge who says that the CBK has started conducting physical inspections of banks in order to expose and punish those that are still lending at high interest rates despite continued cuts on the benchmark rate.

“To ensure that banks are implementing the Risk-Based Credit Pricing Model (RBCPM), the CBK has embarked on on-site inspection of banks to ascertain that they are reducing their interest rates in line with the RBCPM,” said Thugge.

“Any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates will be penalized in accordance with the law.”

This is as the CBK lowered its benchmark rate by 50 basis points and reduced the cash holdings to free up money for lending to customers by commercial banks.

According to Thugge, banks will be hit with a fine of Sh. 20 million or three times the monetary gain. They will also be hit with an additional daily fine of up to Sh. 100,000 for every case or implying for each loan account. Bank executives on their part will be slapped with Sh. 1 million for continuing to lead in the violation.

Yesterday, the the Monetary Policy Committee (MPC) lowered the benchmark lending rate to 10.75 per cent from 11.25 per cent. This was the fourth cut in a row. Between December 2023 and January 2025, the CBK lending rate has fallen from 12.50 per cent to the current 10.75 per cent, reflecting a drop of 1.25 points.

Section 36 (4) of the Central Bank of Kenya Act stipulates that the Central Bank shall publish the lowest rate of interest it charges on loans to banks and that rate shall be known as the Central Bank Rate (CBR).

The level of the CBR is reviewed and announced by the Monetary Policy Committee (MPC) at least every two months and its movements, both in direction and magnitude, signals the monetary policy stance.

The CBR is the base for all monetary policy operations in order to enhance clarity and certainty in monetary policy implementation.

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Whenever the Central Bank is injecting liquidity through a Reverse Repo, the CBR is the lowest acceptable rate. Likewise whenever the Bank wishes to withdraw liquidity through a Vertical Repo, the CBR is the highest rate that the CBK will pay on any bid received. Changes in the CBR reflect the monetary policy stance that the Bank is pursuing.