Nairobi, Kenya – Top executives of Kenya’s leading banks were grilled by the Parliamentary Finance Committee on Thursday over the widening gap between high loan interest rates and persistently low deposit rates. The hearing, held in Nairobi, aimed to address growing public dissatisfaction and ensure greater accountability in the financial sector.
Background of the Issue
Kenyan borrowers have long complained about prohibitive loan rates, which currently average between 14% and 18% annually. This is in stark contrast to the meager interest paid to savers, with most banks offering deposit rates as low as 2% to 4%. Critics argue that these disparities stifle economic growth and deepen inequality, especially for small businesses and middle-class families struggling with access to affordable credit.
The concerns have been amplified by the financial results of banks, which reported record profits in 2023. According to the Central Bank of Kenya (CBK), the sector’s pre-tax profits grew by 25%, reaching an all-time high of KSh 240 billion. These figures have fueled public outrage, with many accusing banks of profiteering at the expense of ordinary Kenyans.
The Parliamentary Hearing
Chaired by Hon. Gladys Wanga, the Parliamentary Finance Committee summoned CEOs from major institutions, including KCB Group, Equity Bank, Co-operative Bank, and Standard Chartered Bank. The committee demanded explanations for the apparent imbalance between lending and deposit rates.
In her opening remarks, Hon. Wanga said, “It is unacceptable that banks continue to charge exorbitant rates on loans while offering near-zero returns to savers. This practice not only erodes public trust but also undermines our economic recovery efforts.”
Key Points Raised
- High Loan Rates: Lawmakers pressed the bank executives to justify why lending rates have remained high, even after the CBK maintained its benchmark rate at 10.5% to stabilize the economy. Critics argued that the rates hinder access to credit for small and medium enterprises (SMEs), which are vital for job creation.
- Low Deposit Rates: MPs questioned why banks were unwilling to pass on the benefits of improved economic stability to depositors, despite having excess liquidity. According to the CBK, commercial banks held surplus reserves of KSh 1.8 trillion by mid-2024.
- Profit Margins vs Consumer Burden: Lawmakers highlighted the contradiction of banks citing operational costs while reporting record profits. “How can you justify an average interest rate spread of 12%? Are Kenyans subsidizing your shareholders’ dividends?” Hon. Babu Owino asked.
- Regulatory Evasion: Some legislators accused banks of exploiting loopholes in the CBK’s regulatory framework to sustain predatory practices.
Responses from Bank CEOs
KCB Group CEO Paul Russo defended the high lending rates, attributing them to global economic pressures, increased compliance costs, and risks associated with unsecured lending. “While we understand the frustrations, we must balance affordability with sustainability. Non-performing loans currently account for 13% of the sector’s total loan book,” Russo explained.
Equity Bank CEO James Mwangi emphasized the need for a collaborative approach, stating, “We are committed to aligning with the government’s agenda for affordable credit. However, we must also consider the risks posed by external shocks, including inflation and currency depreciation.”
Proposed Measures
The Parliamentary Finance Committee outlined several potential reforms to address these issues, including:
- Introducing caps on the interest rate spread to ensure fairness.
- Enhancing transparency in the pricing of loans and deposits.
- Establishing a consumer protection fund for borrowers affected by predatory practices.
The Central Bank Governor, Patrick Njoroge, who was also present, pledged to review existing guidelines and take action against non-compliant banks. “The financial sector must serve all Kenyans equitably, not just shareholders,” he asserted.
Public Reaction and Implications
The hearing has drawn praise from consumer rights groups, with the Kenya Association of Consumers calling it a “critical step toward financial justice.” SMEs have also welcomed the scrutiny, hoping for policies that will make credit more accessible.
However, some financial analysts caution that regulatory interventions may lead to unintended consequences, such as tighter credit conditions and reduced investment in the sector.
