Co-operative Bank Group has announced a two per cent reduction in its base lending rate from 16.5 per cent to 14.5 per cent, passing the much-needed rate cuts benefit to borrowers.

It becomes the first lender to make such a significant cut after last week’s Central Bank of Kenya’s move to lower the Central Bank Rate (CBR) by 50 basis points to 10.75 per cent from 11.25 per cent, to boost credit to the private sector.

The reduction by Co-op takes effect immediately, Group managing director and CEO Gideon Muriuki said, as the lender moves to stimulate credit growth to the private sector and households.

The effective lending rate will be the base lending rate of 14.5 per cent per annum plus a margin of between zero per cent to four per cent, per annum, based on the individual customer’s credit profile.

“The reduction in lending rates is intended to stimulate credit growth to key sectors of the economy notably the MSMEs that are a critical engine to drive and sustain economic growth,” Muriuki said.

The move by Coop Bank marks a continuation of last year where together with its subsidiary–Kingdom Bank headlined the offering of cheaper credit to customers.

The reduction in the lending rates by the Nairobi Securities Exchange listed lender is expected to trigger a wide market response with other banks taking the cue and likewise cutting their rates.

Reduction in lending rates across the board by banks will come as a most timely relief to borrowers and the economy as a whole, especially at this time where majority of Kenyans are grappling with a high cost of living, despite low inflation numbers by government.

Last week, CBK’s Monetary Policy Committee reduced the benchmark rate amid a call to banks to pass the benefits to customers.

It also reduced the Cash Reserve Ratio (CRR) by 100 basis points to 3.25 per cent from 4.25 per cent, to complement the lowering of the CBR, and support lowering of lending rates.

The MPC noted that the reduction in the CRR will release additional liquidity to banks, about Sh57 billion in additional liquidity that banks can lend to the private sector.

“With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector, and support economic activity,” CBK governor Kamau Thugge said. 

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

Under the amendments to the Banking Act recently enacted by Parliament, any bank that has not passed on the benefits of reduced cost of funds to reduce lending rates, will be penalised in accordance with the law, CBK noted.

Co-op Bank and Diamond Trust Bank had the cheapest loans last year among tier one banks in the country, which saw customers enjoy benefits of the recent back-to-back rate cuts.

Lower tier banks which offered cheapest loans included Access Bank, Premier Bank , Consolidated Bank and Co-op’s subsidiary Kingdom Bank, as SMEs remained the biggest beneficiaries.

The recent rate cuts come as CBK moves to implement monetary policies aimed at stimulating economic growth, with overall inflation expected to remain below the mid-point of the target range of 5±2.5 per cent in the near term.

The performance of the Kenyan economy slowed down in the third quarter of 2024, with real GDP growing by four per cent compared to six per cent in the third quarter of 2023.

The growth of the economy in 2024 is estimated at 4.6 per cent compared to 5.6 percent in 2023, mainly reflecting deceleration in growth in most sectors of the economy.

Growth is however expected to pick up this year, with real GDP growth projected at 5.4 per cent, supported by resilience of key service sectors and agriculture, expected recovery in growth of credit to the private sector and improved exports.

This outlook is however subject to domestic and external risks, according to CBK.