Broken Transmission: Central Bank Must Force Commercial Lenders to Cut Credit Costs

High borrowing costs remain the primary bottleneck choking Kenya's economic recovery, even as signals of easing liquidity trickle through the financial system.

For months, the Central Bank of Kenya (CBK) has watched money market indicators soften, but the relief stops abruptly at the doors of commercial banks. This persistent disconnect reveals a clear failure in monetary policy transmission. According to Mwenendo.

The regulator is allowing commercial lenders to pocket the benefits of cheaper wholesale funds while maintaining punitive charges on enterprise and household borrowing, effectively stifling productive investment and job creation.

A Growing Disconnect

The evidence of this structural failure is visible in the numbers. Previous reporting on commercial bank lending rates showed average borrowing costs standing at 14.39% in July 2026, even as ordinary savings yields lagged far behind.

Yet, wholesale liquidity conditions tell a completely different story. Recent coverage of Kenya's interbank rate easing showed the benchmark rate slipping to 8.75% on 11 September, reflecting a far more liquid banking sector.

Furthermore, analysis of how the interbank rate tracks policy confirms that overnight lending between institutions aligns closely with the central bank's signals.

Why, then, does overnight money among institutions trade below 9%, while a small business seeking working capital is charged over 14%? The answer lies in the paralysis of monetary transmission to the real economy.

Spreads Over Growth

The CBK and commercial banks share responsibility for this situation. Commercial lenders continue to enjoy comfortable interest rate spreads, collecting high yields on customer credit while paying minimal returns on ordinary deposits.

The defence offered by lenders, that elevated interest rates simply reflect high credit risk or that government debt issuance crowds out private capital, does not fully account for this stubborn inertia.

As detailed in reporting on Treasury bill auctions setting borrowing costs, government paper does establish a baseline risk-free rate, but it should not serve as an excuse for commercial banks to ignore wholesale liquidity easing.

Instead of deploying funds to creditworthy local businesses, banks find it far safer and more lucrative to lock in high margins. By refusing to enforce compliance or introduce structural mechanisms that mandate prompt rate adjustments, the CBK has become a passive spectator to bank profitability at the expense of national growth.

The Six-Month Test

The current regulatory posture is unviable. The CBK must move beyond moral suasion and implement explicit mechanisms that force commercial banks to adjust their base lending rates in direct alignment with monetary policy shifts. Lenders that enjoy access to cheap central bank liquidity and stable interbank markets cannot be permitted to isolate retail borrowers from those benefits indefinitely.

The true test for the central bank will not be found in quarterly macroeconomic statements, but in retail borrowing schedules over the coming months.

If average commercial lending rates do not record a significant and sustained drop within the next six months, the CBK will have failed its primary mandate of using monetary policy to support economic activity.

Kenya's productive enterprises cannot afford another year of expensive credit while the banking grid floats on cheap money.