Commercial banks are squeezing depositors in the race to grow profits as they cut interest on savings by larger margins compared to lending rates.
Central Bank of Kenya (CBK) data shows the savings rate — the return paid by banks for demand deposits — fell to 6.86 percent in March this year from 11.48 percent in June 2024, representing a 4.72 percentage drop.
But lending rates have fallen by a smaller 2.19 percentage drop over the period to 16.85 percent in March, reflecting how banks are using cheaper deposits to drive profits as high-net-worth investors with cash to keep in banks lose out.
The spread — the difference between the average lending rate and the fixed deposit rate — increased to 7.80 percent in March from 5.37 percent in June 2024 as banks cut returns on high-net-worth fixed deposits.
This emerged in a period when the banking regulator has raised concerns about banks being quick to cut deposit rates and slow to lower lending rates in line with cuts in the benchmark rate, delaying relief to borrowers plagued with costly loans.
At 6.86 percent, investors who have put cash in fixed deposits are trailing returns from government and bank bonds, but better than the benefits from shares at the Nairobi Securities Exchange (NSE).
Banks, including Equity Bank, KCB, NCBA, Co-operative and I&M Bank, posted significant profit growth in the opening quarter of 2026, largely from higher net interest income, mirroring the squeeze of depositors.
Analysts reckon that banks have been able to attain bigger lending margins or spreads from an easier release of expensive deposits as lending rates remain relatively elevated on unchanged borrower risks.
“The translation to lower deposit rates is quicker because the payments on fixed deposits are largely guided by Treasury bill rates, which have been coming down,” said Melodie Ndanu, a Senior Research Associate at Standard Investment Bank (SIB).
“The risk environment hasn’t changed that much. The non-performing loans (NPL) ratio remains close to 15 percent. Under the new risk-based pricing model, some borrowers like MSMEs and retail are still facing relatively higher interest rates due to customer segmentation under the model.”
Nearly all tier-one banks have posted higher profitability in the opening quarter of the year by slashing interest payments to depositors.
Equity Group Holdings rode the trend to post a 23.8 percent growth in profit for the first quarter ending in March 2026 to Sh18.3 billion.
The profit jump followed a 19 percent drop in interest expenses to Sh10.7 billion from Sh13.3 billion a year prior as the bank’s net interest margin expanded to 8.4 percent from 7.4 percent in March 2025.
The group’s interest income expanded by 4.5 percent to Sh43.7 billion from Sh41.8 billion, but marked a sluggish growth in fresh loans.
KCB Group’s net profit rose by 10.7 percent to Sh17.81 billion in the same period as its net interest income expanded by 8.6 percent to Sh36.61 billion from Sh33.72 billion previously.
NCBA also saw a bump in net profits for the period by 8.8 percent to Sh5.96 billion, helped by a rise in net interest income as costs of funds fell.
Net interest income for the lender grew by 22 percent to Sh12.16 billion from Sh9.97 billion previously.
The Co-operative Bank of Kenya posted a 21.2 percent growth in net profit for the opening quarter to Sh8.4 billion on increased interest and non-interest income.
Standard Chartered Bank Kenya has been the only tier-one lender to buck this trend so far, after seeing a 24.4 percent drop in net interest income in the quarter to Sh6.2 billion from Sh8.2 billion as revenues from lending fell faster than interest expenses, mirroring a reduction in lending margins.
The bank posted a 26.3 percent drop in profit for the period to Sh3.5 billion, from a higher Sh4.8 billion at the same time last year.
Average commercial bank interest rates have fallen in tandem with the eased CBK policy rate, which currently stands at 8.75 percent, in contrast to a high of 13 percent at the start of August 2024.
Mean Treasury bill rates fell to as low as 7.5 percent for the 91-Treasury bill as of March 2026 from a peak of 16.7 percent at the start of 2024.
The longer dated 364-day T-bill also fell to 8.4 percent from a peak of 16.8 percent over the same period.
Commercial banks’ fixed deposit rates have mirrored the drop in the short-term papers as their returns are closely derived from the low-risk rates on T-bills.
Short-term interest rates and commercial banks’ lending rates have declined, in line with recent reductions in the Central Bank Rate (CBR), the CBK said last month.
Private sector credit growth has staged a recovery from the lower rates, reaching 8.1 percent in March, but remains well below the double-digit rates of growth posted across 2023.
Commercial banks have exercised caution in lending to the real economy on sticky borrower risks and have instead favoured investments in government securities, especially the near-cash Treasury bills.
This has been demonstrated by banks’ high liquidity ratios, which reflect significant holdings of cash and near-cash assets.
“If you add cash and cash equivalents to government securities, it means out of the Sh2 trillion, Sh1 trillion is available for disbursement. We have Sh150 billion going into cash and cash equivalents, demonstrating our readiness and capability to fund growth and to support our customers because of being cash-rich,” said James Mwangi, the Equity Group chief executive officer.
“Banks are not desperate for liquidity, but are rather risk-averse, choosing to instead lend to the government through Treasury bills and bonds,” Ms Ndanu said.
A spike in inflation from the US-Israel war on Iran is seen switching the interest rate environment in the near-term, as the CBK is forced to raise its benchmark rate to counter higher consumer costs and pressure on the exchange rate.
Inflation rose by the fastest pace in seven years in April, hitting 5.6 percent from 4.4 percent in March as fuel prices spiked.
The cost of living is expected to remain under pressure, with fuel prices having risen again this month to hit more than Sh200 for petrol and diesel.
Banks expect a first CBK benchmark increase for the first time since February 2024.
“All indicators from fuel to consumer prices are showing that there is going to be a markup in the CBR. All eyes will be on CBK, and we expect pressure to raise the CBR as we look at rising inflation in the economy and a test on currency stability,’’ said Raimond Molenje, Kenya Bankers Association CEO.
