A new Central Bank of Kenya (CBK) report has revealed a growing gap in loan costs across the country’s banking sector, with Co-operative Bank and Diamond Trust Bank (DTB) emerging as the most affordable lenders among tier-one banks.
The findings come after the CBK made its boldest move since the COVID-19 pandemic, cutting the Central Bank Rate (CBR) from 12.75% to 12% on October 8, 2024. This reduction marks the largest single drop in recent years and signals a significant shift in Kenya’s monetary policy.
According to the report, Co-operative Bank and DTB have taken the lead in offering competitive rates, setting them apart from their tier-one competitors. This move has sparked what industry experts are calling a “price war” in Kenya’s lending market.
“We’re seeing a real shake-up in the banking sector,” says John Mwangi, a financial analyst at Nairobi Securities Exchange. “Some banks are quickly adapting to the CBK’s rate cut, while others are moving more cautiously. This creates clear choices for borrowers.”
The CBK’s decision to lower the base rate follows encouraging economic indicators, particularly the sharp drop in inflation to 3.6% in September 2024 – the lowest figure Kenya has seen since December 2012. This dramatic fall in inflation has given the central bank room to ease monetary policy.
Moses Kimani, Head of Research at Pioneer Investment Bank, explains the timing of the rate cut: “The CBK has spotted a perfect opportunity. With inflation at its lowest in over a decade, they can now focus on stimulating economic growth through cheaper credit.”
The impact of these changes is already reaching ordinary Kenyans. Small business owner Jane Wanjiku describes her experience: “Last year, I couldn’t even think about taking a loan because the rates were too high. Now, I’m seeing offers from Co-op Bank that actually make sense for my business.”
The disparity in lending rates has created a clear divide in the banking sector. While Co-operative Bank and DTB lead with lower rates, some tier-one banks continue to maintain higher lending costs. This gap has prompted customers to shop around for better deals.
David Mutiso, a banking sector consultant, points out the broader implications: “This isn’t just about lower rates. We’re seeing a fundamental shift in how banks compete for customers. Those who don’t adapt might lose market share to more aggressive competitors.”
The CBK’s rate cut has sparked optimism among businesses and consumers alike. Local entrepreneurs, in particular, see this as a chance to expand their operations after a period of limited credit access.
Small and medium enterprises (SMEs) stand to benefit significantly from these changes. “For the first time in months, we’re seeing realistic borrowing options,” says James Omondi, chairman of the Kenya Small Traders Association. “This could be the boost many small businesses need.”
Looking ahead, financial experts predict more banks might follow Co-op and DTB’s lead. The pressure to remain competitive, combined with the CBK’s supportive stance, could trigger a broader reduction in lending rates across the sector.
However, some banks remain cautious. A senior banker, speaking on condition of anonymity, explains: “While we welcome the CBR reduction, banks must balance competitive pricing with risk management. Not all institutions can immediately match the lowest rates in the market.”
The CBK’s governor has indicated that the central bank will continue monitoring the situation closely. The focus remains on ensuring that banks pass on the benefits of the rate cut to borrowers while maintaining stability in the financial sector.
For consumers, these changes mean it’s crucial to compare offers from different banks. Financial advisors recommend that borrowers should:
- Shop around for the best rates
- Read the fine print carefully
- Consider the total cost of borrowing, not just the interest rate
- Check for any hidden charges or fees
As Kenya’s banking sector adapts to these changes, the coming months will likely show whether other banks will join the price war initiated by Co-op and DTB. Meanwhile, borrowers enjoy more choices and better rates than they’ve seen in years.