Kenya’s banking sector is undergoing a significant transformation, marked by a reduction in interest rates that could have a profound impact on the country’s economy. In February 2025, several banks announced lower interest rates, a decision that aims to boost borrowing and support economic growth amid persistent financial challenges.

Economic background of Kenya

Kenya, like many African countries, has faced economic challenges in recent years. The COVID-19 pandemic has impacted many sectors, causing the economy to contract by 0.3 % in 2020. Although the country has experienced a recovery, growth has remained fragile, with GDP growth rates estimated at 5.2 % in 2023, according to the World Bank.

High interest rates have been a major barrier to borrowing for businesses and individuals. In 2024, the average interest rate on bank loans in Kenya was about 13.5 %, which restricted access to credit and held back investment. Faced with this situation, banks have begun to reassess their interest rate policy.

Reducing Interest Rates

In February 2025, several major Kenyan banks, including Equity Bank and CBK Bank, announced interest-rate cuts of 1-2 points. Equity Bank cut its interest rate on personal loans from 13% to 11%, while KCB lowered its rate on loans to small and medium-sized enterprises (SMEs) from 12% to 10%.

Economists and entrepreneurs have welcomed the decision with enthusiasm. According to a study by the Kenya Bankers Association, about 60% of firms surveyed said that lowering interest rates would encourage them to borrow more to finance their operations and expansion projects.

Penalties for failing to align

Kenyan banks are rapidly lowering their lending rates following a mandate from the Central Bank of Kenya (CBK), which has warned financial institutions of daily penalties for non-compliance.

The regulator is taking tough action against banks that delay lowering rates despite the central bank’s multiple rate cuts aimed at making credit more affordable for businesses. Under Kenya’s banking law, CBK has the power to impose fines of KES 20 million (154,619 USD) or three times the financial profit obtained by noncompliant lenders.

Banks face additional penalties of 100,000 KES (773 USD) per day for each violation. Meanwhile, bank executives could face fines of up to KES1 million (7,730 USD). Major financial institutions such as KCB Group, Equity Group, Cooperative Bank, I&M and DTB responded by lowering interest rates by one to four percentage points. CBK’s goal is to stimulate economic activity and provide relief to households and businesses facing financial hardship.

Impact on economy

Reducing interest rates could have several positive effects on the Kenyan economy. For starters, it should encourage more borrowing, which could boost consumption and investment. SMEs, which account for around 80% of jobs in Kenya, could benefit particularly from this measure, allowing them to access finance on more favorable terms.

In addition, increased borrowing could also support job creation. It is estimated that each million Kenyan Shillings (around 6,800 USD) invested in an SME could generate up to 10 direct jobs. If banks can boost borrowing, this could help reduce the unemployment rate, which stood at about 7.4% in 2024.

Reactions of economic actors

Reactions to this decision are largely positive. Entrepreneurs, particularly those in sectors most affected by the pandemic, have been optimistic about the future. With lower interest rates, investors can invest in new equipment and hire more staff.

However, some analysts warn of the potential risks associated with this rate reduction. They stressed that failure by banks to manage credit risks could lead to an increase in defaults. In 2024, the bad-loan ratio in the Kenyan banking sector was about 14%. This figure could rise if borrowers are unable to repay their loans.

Stabilizing Kenya’s Economy in the Short Term

Over the long term, lowering interest rates could help stabilize the Kenyan economy and promote sustainable growth. However, it is essential that banks adopt prudent lending practices to avoid a credit crisis. Financial regulators will also need to monitor market developments closely to ensure that banks maintain responsible lending standards.

Moreover, Kenya’s government could play a key role in supporting initiatives aimed at building economic resilience. Training programs for entrepreneurs, tax incentives for investment in SMEs, and efforts to improve market access could all help to maximize the benefits of lowering interest rates.