Sharp Squeeze: Banks Lending Margin Widens as Depositors Face Painful Returns

Banks lending margin has widened significantly as lenders lower returns to depositors more aggressively than they reduce borrowing costs, creating fresh scrutiny over pricing practices in Kenya’s financial sector. Latest banking sector data indicates that while lending rates have eased marginally in response to policy signals, deposit rates have declined at a faster pace, effectively expanding the spread between what banks charge borrowers and what they pay savers. The result is stronger interest income for banks at a time when credit growth remains subdued.

Figures from the Central Bank of Kenya show that commercial banks have adjusted their cost of funds downward in recent months. However, the transmission to borrowers has been slower, leaving households and businesses facing relatively high financing costs even as savers earn less on deposits. The widening gap reflects a strategic recalibration by lenders seeking to protect profitability amid slower loan uptake and rising credit risk in segments of the economy.

Banks Lending Margin Expands as Deposit Rates Fall Faster Than Loan Pricing

Banks lending margin expansion has been driven largely by aggressive repricing of deposits. Fixed-term and savings account returns have declined notably as banks manage liquidity levels and adjust to moderating inflation and policy rates. At the same time, average lending rates have edged down only slightly, preserving a healthy spread. This differential is critical because interest income remains the backbone of Kenyan banks’ earnings.

Industry analysts note that lenders are prioritizing balance sheet stability over rapid credit expansion. With non-performing loans still elevated in key sectors, banks appear cautious about cutting lending rates too quickly. “Banks are managing risk very carefully,” says a Nairobi-based banking analyst. “Lowering deposit rates immediately reduces funding costs, but reducing lending rates carries credit quality implications. The spread becomes a buffer.”

Data from the Kenya Bankers Association indicates that private sector credit growth has remained modest despite easing macroeconomic pressures. This suggests that demand for new borrowing has not fully rebounded, giving banks limited incentive to compete aggressively on loan pricing. For depositors, however, the squeeze is tangible. Lower returns on savings accounts erode purchasing power, particularly in an environment where household budgets remain stretched.

Banks Lending Margin Debate Intensifies Amid Profit and Fairness Concerns

The widening banks lending margin is likely to intensify debate over pricing transparency and competitive dynamics in the sector. Consumer groups argue that faster downward adjustments on deposit rates compared to lending rates raise fairness concerns, especially when profitability improves. Kenyan banks have reported resilient earnings supported by strong net interest income. While this underlines sector stability, it also draws attention to how gains are distributed between shareholders, borrowers and savers.

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Regulatory oversight remains a central factor. The Central Bank of Kenya has consistently emphasized the need for risk-based pricing and market-driven interest rates following the repeal of interest rate caps in 2019. Policymakers maintain that flexible pricing supports financial system stability. Still, the current dynamic may influence future policy discussions, particularly if credit growth remains muted while margins expand.

Economic observers argue that sustainable growth requires a delicate balance. If lending rates remain elevated, businesses may delay expansion plans, slowing broader economic recovery. Conversely, if deposit rates remain compressed for prolonged periods, household savings mobilization could weaken. “The question is whether margin expansion is temporary or structural,” the analyst adds. “If banks maintain wide spreads even as risk conditions ease, competitive pressure may need to increase.”

For now, the data underscores a clear trend: banks lending margin is widening, cushioning profits but amplifying debate about the pace and fairness of interest rate transmission.