From 1906 to 1992, interest rates in the Kenyan Banking Sector were effectively capped by market forces and banks thrived while making reasonable profits. From 1993, banks increasingly collaborated on setting interest rates, and the sector began registering exceptionally high profits, from average interest rate spreads of 11.4% compared to the world average of 6.6% .

In the past weeks there has been heated debate over the assent by President Uhuru Kenyatta of the new Amendment of the Banking Act. The Amendment of the Banking Act puts a cap on the lending rates at 4% above the Central Bank Rate (CBR) and a floor on deposit rates at 70% of the CBR.
This news was received with jubilation by many Kenyans, who see it as opening the doors for access to affordable credit from the Kenyan Commercial Banks. For the banking sector stakeholders it was not the greatest news, as it will inevitably translate into lower earnings or profitability for the remaining half year and possibly into the future.

One of the key drivers in the real estate sector is access to reasonably priced construction financing and mortgage facilities.

Risk is mitigated by the fact that the lender holds a legal charge on the subject property during facility amortization, and repayment ability is based on income accounts. Further, earning or employment history, credit score information, guarantors or employers’ commitment to remit dues, mortgage and life insurance covers are taken up to ensure seamless loan repayment. Despite security near perfection in the property market, the banks have been receiving almost double the principal during the term of the facility. For this reason, home ownership remains a dream for many Kenyans.

Saccos have taken up some of the mortgage/home ownership financing space, with some aggressively developing housing scheme projects where their clients are able to own homes and land at reasonable lending rates normally pegged at 12% per annum. The new bank rates will bring them closer to the Sacco lending rates, but are not likely to derail Sacco competitiveness and growth.

It remains to be seen how exactly Banks will respond in totality. There is the possibility that citing the new developments they may levy additional fees on non-funded income transactions in the short term, so as to sustain their quarterly budgets and profit plans.

There are also fears that smaller developers and mortgage customers, and small and medium-sized businesses in general, may have reduced access to credit, as banks may shift from traditional markets to lending to corporates and individuals of high net worth only. But are there really enough of these to sustain the entire commercial banking sector?

Over the medium to longer term, most Kenyans would hope that many banks will adjust their commercial models towards a lower margin higher volumes framework.

Although outcomes from around the world have been mixed, many Kenyans including those of us in the real estate sector, remain hopeful that the naysayers will not carry the day on this one.

As we brace ourselves for the economic downturn that inevitably accompanies the election cycle, we trust that Kenyas capping of interest rates will indeed bring the much awaited relief to many businesses and individual investors and entrepreneurs, and ignite a healthier, more sustainable growth trend in the real estate sector and the country’s economy as a whole.


  • The Business Daily
  • Kenya Bankers Association Journals
  • Institute of Certified Public Accountants of Kenya(ICPAK)Journals

We welcome your feedback on this article. Please send it to



Translate »