Why Lower Policy Rates Don’t Always Mean Cheaper Loans

When the Central Bank of Kenya, CBK, trims its benchmark rate, the assumption is simple: borrowing gets cheaper. In practice, it’s rarely that straightforward.

A policy rate cut sets the tone, but what actually lands on a borrower’s statement depends on a tangle of other factors: government bond yields, how banks fund themselves, bad debt levels, individual risk profiles, and the margins lenders need to stay in business.

          1. Government securities still compete for banks’ money

Banks are among the biggest buyers of government paper, Treasury bills, bonds, and the like. When those instruments pay well, banks have less reason to chase riskier returns by lending to businesses and households.

So, if yields on government debt stay elevated, don’t expect lending rates to follow the policy rate down in a hurry. The two are linked, but not on the same clock.

        2. Bad loans push rates the other way

Non-performing loans are a quiet but powerful drag on rate cuts. Every default costs a bank money and forces it to set aside provisions against future losses.

The more borrowers struggle to repay, the wider banks tend to keep their lending spreads, a built-in cushion against risk that doesn’t disappear just because the central bank has eased.

      3. Not all borrowers are equal

A policy rate cut lowers the general cost of money, but it says nothing about you specifically. Banks still look at income, credit history, collateral, and business performance before setting a price.

Someone flagged as higher risk can end up paying well above the “market rate” even in a falling-rate environment, because the discount applies to the system, not to any one borrower’s file.

       4. Deposits have their own price tag

Loans don’t fund themselves; deposits do, along with other borrowing banks they rely on. If the interest banks are paying out on deposits stays high, there’s only so far they can cut what they charge on loans without eating into their own margins. Slash lending rates too fast while funding costs lag behind, and profitability takes the hit.

       5. Margins are non-negotiable

Every bank needs a gap between what it pays for money and what it earns lending it out. That spread covers operating costs, tech investment, regulatory compliance, credit losses, and returns to shareholders. It’s not something a single rate cut can wipe away, which is exactly why policy changes rarely translate one-for-one into cheaper credit.

Transmission takes time; before adjusting what customers pay, banks are quietly working through their funding costs, liquidity position, risk appetite, and what competitors are doing. A rate cut is good news, but it’s the opening move, not the final word.

The real story isn’t whether the policy rate fell. It’s whether and how much that cut actually makes its way through the banking system to the person taking out the loan. Government yields, deposit costs, defaults, borrower risk, and bank margins all get a vote before that happens.

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