In April 2025, the Central Bank of Kenya (CBK) announced that it would begin imposing daily fines on banks that fail to adjust lending rates downward in line with recent reductions in the Central Bank Rate (CBR). This move is intended to ensure compliance with CBK’s risk-based credit pricing model and to ensure that monetary policy decisions translate into tangible benefits for borrowers. The inspection and enforcement measures are currently on course as they were set to begin in June 2025. The Monetary Policy Committee lowered the CBR to 9.75% on June 10, down from 10% in April.

This is part of a broader trend. Since February 2024, CBK has been on a steady path of rate cuts, reversing previous tightening. Despite these cuts, the CBK shows that commercial banks have been slow to lower their lending rates.

Regulatory Leverage vs Market Autonomy 

CBK’s plan to inspect and potentially fine banks has presented the question of whether this is a case of regulatory overreach or a necessary measure to protect consumers. On the one hand, banks are private entities that operate based on a range of market factors, including cost of funds, credit risk assessments, and shareholder expectations. Pushing for lower rates could be seen as an infringement on their commercial autonomy.

On the other hand, the CBK has a mandate to maintain monetary stability by ensuring that its policy decisions have a real impact. If banks are quick to pass on interest rate hikes to borrowers but slow to implement cuts, then the intended effect of lower interest rates doesn’t reach the economy. In this scenario, regulatory leverage is used as an instrument to ensure that interest rate changes work as intended. One reason for the slow adjustment is the banks’ cost structure. Many banks rely on fixed-term deposits and long-term funding agreements that were priced at higher interest rates. This makes it costly to reprice loans downward in the short term without eroding profitability. 

Effectiveness of Enforcement

Under the Banking Act and the Central Bank of Kenya Act, the CBK has supervisory authority over licensed financial institutions, including powers to examine their operations and enforce compliance with regulations. Kenya’s recent history with interest rate regulation offers context. In 2016, the country enacted the Banking (Amendment) Act of 2015, which imposed a cap on interest rates, specifically, capping lending rates at no more than 4% above the Central Bank Rate. Although the cap was repealed in 2019 due to concerns about credit access and market distortions, it demonstrated that the state can and has previously had a say in lending rate behaviour through legislation.

The Central Bank has grounded its approach in Section 55 of the Banking Act, which outlines the penalties for non-compliance. Banks that fail to comply with the directive to reduce rates may face fines of up to KSh 20 million or three times the financial gain derived from the violation, whichever is higher. Additionally, banks may incur daily penalties of up to KSh 100,000 per violation. Notably, individual bank executives may also be held personally liable, facing fines of up to KSh 1 million for their role in the non-compliance. These provisions provide CBK with a stronger basis to act decisively. Still, past experiences have shown that vague or overly broad regulatory guidance often leads to court challenges or loopholes that weaken the effectiveness of policy outcomes. 

Conclusion 

Rather than relying solely on penalties, CBK could amplify the impact of its policies by integrating incentives into its regulatory approach. This would not only foster greater compliance but also build long-term trust and cooperation with the banking sector. Recognising that high lending rates may stem from legitimate operational realities, an incentive-based strategy enables more constructive engagement and reflects a mature, balanced regulatory approach. Aligning with international best practices, this approach could be more sustainable and effective in ensuring that monetary policy decisions translate into tangible benefits for the economy. Ultimately, the goal should be to ensure that monetary policy decisions lead to tangible outcomes for households, businesses, and the broader economy. In doing so, the CBK will not only protect the credibility of its tools but also ensure that they remain effective.

Fact Box

 Central Bank of Kenya’s Rate Adjustments

• February 4, 2024: Raised to 13.00%
• August 6, 2024: Lowered to 12.75%
• October 8, 2024: Lowered to 12.00%
• December 5, 2024: Lowered to 11.25%
• February 5, 2025: Lowered to 10.75%
• April 8, 2025: Lowered to 10.00%
• June 10, 2025: Lowered to 9.75%