By Benadeta Mwaura - Reporter
Kenya, August 17, 2026 - The era when Kenyan banks could comfortably generate net interest margins of 9 to 10% is coming to an end as lower interest rates continue to squeeze lending yields, KCB Group Chief Financial Officer Lawrence Kimathi has said.
Kimathi said the Kenyan banking market is entering a new environment where net interest margins could settle at between 6.5 and 7%, provided banks manage their funding costs efficiently.
“Especially in the Kenya market, the days of having NIMs of 9-10 per cent are gone. They’re long gone,” Kimathi said during an interview.
His comments come as the Central Bank of Kenya maintains a significantly lower policy rate than in previous years, with the Central Bank Rate currently at 8.75% after the rate was held unchanged for the third consecutive meeting on August 11.
The easing cycle has already filtered through to commercial bank lending rates. According to CBK data cited by People Daily, the average lending rate fell to 14.3% in July 2026, down from 17.2% in November 2024.
For borrowers, the decline represents cheaper credit.
For banks, however, it means the income generated from loans is being compressed.
Net interest margin measures the difference between what a bank earns from interest-generating assets, such as loans and securities, and what it pays for funding such as customer deposits.
It is therefore one of the most important indicators of how effectively a bank turns its balance sheet into interest income.
When the CBK lowers its policy rate, commercial banks generally follow by reducing lending rates. That reduces the return banks earn from loans.
The challenge is that banks cannot necessarily reduce the cost of deposits at the same speed.
Customers can move their money into alternative investments, including government securities, if those instruments offer better returns.
Kimathi illustrated the competition using Treasury bills.
“If you come and give me 10 billion and I tell you I’ll pay you seven, you tell me the 91-day bill is at eight. That is even supposed to be risk-free. I’ll go there,” he said.
This means banks must continuously balance what they charge borrowers against what they must offer depositors to retain funding.
KCB has already managed to reduce its cost of funds from 3.9% to 3.4%, helping cushion some of the pressure on its margins.
But Kimathi's comments suggest that lower margins are becoming a structural feature of the Kenyan market rather than a temporary problem.
The changing interest-rate environment is forcing banks to reconsider how they generate earnings.
For KCB, one answer is volume.
The group's loan book grew by about 14% in the first half of 2026, while deposits increased by 15%. New customers accounted for approximately 15% of the loan growth.
The strategy is straightforward: if the bank earns less from each shilling lent, it can partly compensate by increasing the amount of business it conducts.
But volume alone is not enough.
A rapidly expanding loan book can also increase credit risk if loans are not properly assessed and managed.
KCB appears to be addressing that pressure through a combination of stronger loan growth and improved asset quality.
The bank's non-performing loan ratio fell to 15.1%, its lowest level in 57 months. Kimathi said the stock of non-performing loans had declined by about KSh30 billion over the previous 15 months, following restructuring, settlements, recoveries and write-offs.
That improvement matters because every loan that goes bad eats into a bank's income through provisions and eventual losses.
The other major shift is away from relying almost entirely on interest income.
KCB's non-funded income, money generated through fees, commissions, foreign exchange and other services, is becoming an increasingly important part of its business.
The bank said service fees increased by 13%, while its digital business was processing approximately KSh1.7 billion in transactions every day.
More from Kenya
This is important because digital transactions allow banks to generate income from a much wider range of customer activity without necessarily increasing their loan exposure.
Payments, transfers, foreign exchange, digital lending and other financial services can therefore become additional sources of revenue as the traditional lending margin narrows.
KCB's first-quarter results had already demonstrated this shift.
The group's operating income increased by 8.5%, despite pressure on net interest margins, as growth in interest-earning assets helped offset weaker yields.
The pressure on margins is affecting the wider banking industry, although individual banks are experiencing it differently.
Data from Cytonn cited by People Daily showed that in the first quarter of 2026, net interest margins stood at 8.9% for Co-operative Bank, 8.5% for KCB, 7.9% for Equity and 7.7% for NCBA.
The differences demonstrate that the cost of funding, loan pricing, customer mix and business model remain important even when banks operate under the same monetary-policy environment.
KCB's expected 6.5-7% range is therefore not necessarily a forecast for every Kenyan bank.
It is an indication of where the country's largest banking groups could be heading as lower rates increasingly work through their balance sheets.
The change has an important implication for Kenyan borrowers.
Lower lending rates should make credit more affordable for households and businesses that qualify for loans.
For small businesses, cheaper financing could reduce the cost of working capital and investment. For households, lower rates can reduce repayments on loans whose pricing is linked to prevailing market rates.
But the benefit to borrowers comes with a corresponding reduction in the amount banks can earn from each loan.
That creates pressure on banks to become more efficient.
KCB has already reduced its cost-to-income ratio to about 44%, which Kimathi said reflected improved productivity.
In other words, the bank is attempting to compensate for lower margins by ensuring that a smaller share of its income is consumed by operating costs.
This could become increasingly important as competition intensifies.
The emerging picture is of a Kenyan banking industry gradually moving away from a model where profitability depends heavily on the spread between lending and deposit rates.
Instead, banks will need to combine larger loan books, cheaper funding, better credit management, digital transactions, fees, foreign exchange and operational efficiency.
KCB's first-half results demonstrate the direction of travel.
Its loan book expanded by 14%, deposits by 15% and its cost-to-income ratio improved to 44%. At the same time, the bank increased its reliance on non-funded income as lending margins came under pressure.
The bank is also looking beyond Kenya for growth, with Kimathi pointing to stronger performance in some of its other markets as well as foreign exchange, digital services and new products as potential sources of earnings.
The shift could ultimately make the banking sector more competitive, particularly if banks respond to lower margins by pursuing efficiency rather than simply attempting to preserve profitability through higher charges.
For now, however, Kimathi's warning marks a clear change in the industry's economics.
The 9-10% net interest margin era is fading, and Kenyan banks are being forced to find new ways to make money in a lower-rate economy.
For KCB, the answer appears to be more customers, more lending, cheaper funding, better efficiency and more revenue from services beyond traditional interest income.