Feature: Kenya’s Interest Rate Dilemma: Why Cheaper Loans Aren’t Sparking Economic Revival

The Central Bank of Kenya (CBK) has once again cut its benchmark Central Bank Rate (CBR) by 25 basis points to 9.75% in a bid to stimulate borrowing and economic growth. But despite a series of rate cuts, private sector credit growth remains sluggish, raising questions about whether monetary policy alone can revive Kenya’s slowing economy.

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The CBK’s latest move marks a continued easing cycle, with commercial lending rates declining from 17.2% in November 2024 to 15.4% in May 2025. Yet, private sector credit expansion remains low growing at just 2% in May, up from 0.4% in April and a -2.9% contraction in January.

Why Aren’t Businesses Borrowing?

1. Banks Are Still Risk-Averse

– Non-performing loans (NPLs) have surged to 17.6%, with defaults concentrated in trade, household loans, tourism, and construction.

– Lenders are tightening credit standards, making it harder for small businesses and consumers to access loans.

2. Economic Slowdown Dampens Demand – Kenya’s GDP growth fell to 4.7% in 2024 from 5.7% the previous year, with contractions in manufacturing, construction, and wholesale trade.

– Businesses are hesitant to take on debt amid weak consumer demand and high operational costs.

3. Global Headwinds Add Pressure

– US trade tariffs and a slowdown in China threaten Kenya’s exports.

– The IMF has revised Kenya’s 2025 growth forecast downward to 5.2%, citing external risks.

Inflation Under Control—But at What Cost?

The CBK’s easing stance has been supported by falling inflation, which dropped to 3.8% in May, well within the 5% ±2.5% target range. This is majorly drive by a stronger shilling(reducing import costs) as well easing prices of commodities.

The Bigger Question, Can Lower Rates Still Spur Growth?

The CBK’s strategy hinges on cheaper credit reigniting business investment and consumer spending. But economists warn that monetary policy alone may not be enough.

What’s Needed for a Real Recovery?

– Fiscal reforms to reduce business costs (e.g., lower taxes, fewer levies)

– Stronger export competitiveness amid global trade tensions

– Debt relief measures for struggling sectors (tourism, construction)

The Bottom Line

While the CBK’s rate cuts signal confidence in macroeconomic stability, structural challenges such as, rising bad loans, weak credit demand, and global uncertainties—threaten to undermine recovery efforts.

For Kenyans, this means:

1.Borrowers may get slightly cheaper loans—if banks approve them.

2.Investors will earn less, as interest rates fall.

3.Businesses still remain cautious, with many delaying expansion plans.

The big question: Will lower rates eventually unlock growth, or is Kenya in need of deeper economic reforms?

Source: CBK, Trading Economics, The Exchange Africa.

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