CBK to penalise banks for non-compliance with lending guidelines

Commercial banks that fail to comply with the Central Bank of Kenya (CBK) lending guidelines now risk penalties of up to three times their profits. This comes as CBK moves to accelerate the reduction of lending rates, following its continued monetary easing measures. 

In its first Monetary Policy Committee (MPC) meeting of the year, CBK lowered the Central Bank Rate (CBR) to 10.75% from 11.25%, a 50-basis point reduction, aimed at encouraging banks to reduce borrowing costs.

To ensure compliance, CBK has launched on-site inspections of banks, checking if they are implementing the risk-based credit pricing model.

CBK Governor Kamau Thugge confirmed that five banks are currently under review, with the findings expected in two weeks. Institutions found flouting CBK directives will face strict penalties.

“If we just follow the risk-based credit pricing model, there is no reason why the lending rates to the private sector should not come down. There is a provision now, to charge the banks by penalties that are three times the amount the individual banks have benefited by,” Thuge said.

He expressed optimism that the reduction in both the CBR and the cash reserve ratio (CRR) will increase liquidity in the banking sector, making more funds available for lending.

Further, Thuge noted that lowering the CBR should reduce deposit costs for banks, enabling them to offer cheaper loans.

“Once that happens, we should be able to see more demand either for consumer durables but also for investments and that increase in aggregate demand is what we are expecting will also stimulate economic growth and for that reason we have increased the growth from 4.6 percent in 2024 to 5.4 percent,” said the CBK Governor.

Additionally, CBK has written to over ten banks, requiring them to increase their core capital to over Ksh.3 billion.

Despite these regulatory moves, Kenyan banks remain well-capitalized, with cumulative pre-tax profits rising by Ksh.36 billion to Ksh.262.3 billion in December 2024, compared to Ksh.226.3 billion in December 2023.