CBK Targets Banks Offering Expensive Loans With Daily Penalties

Hello and welcome to the Morning News Roundup Newsletter, where we are covering Ksh20 million fines for banks, Kenyans' Ksh1.4 trillion investments in bonds and unit trusts such as MMFs, and the Ksh1.7 trillion used to repay loans.

Daily Penalties for Banks Offering High-Interest Loans

Kenyans can expect a drop in interest rates on bank loans as the Central Bank of Kenya (CBK) steps up physical inspections to ensure lenders comply with its new pricing model.

A report by Business Daily indicated that the inspections could result in daily fines of around Ksh100,000 per loan account. This will largely affect lenders that fail to implement the new model, which is tied to the interbank rate.

Bankers also face fines of up to Ksh20 million. According to the CBK, the new pricing model replaces the old system that allowed each bank to set its own base rate. Some lenders, as a result, failed to reduce loan interest rates in line with the drop in the base rate.

“I think it will change very significantly. We did on-site inspections of all the banks, and those inspections were really to see how and whether the banks were following their credit pricing models. The results were not very encouraging, and this is also part of the reason why we are overhauling the whole risk-based pricing system. In fact, some banks were not even following the models we had agreed on with them, and of course, now we are in the process of assessing whether there will be penalties and how much those penalties will be," CBK Governor Kamau Thugge said.

Under the new model, the interbank rate has a volatility limit of 75 basis points. This means that loan rates can only deviate from the 9.5% rate set by CBK in August by up to 0.75 percentage points — between 8.75% and 10.25%. The aim is to ensure that the benefits of monetary policy are transmitted to the real economy.

Catch Up Quick: In our earlier newsletter, we reported that Kenyan banks cut personal and household lending from Ksh1.082 trillion to Ksh943 billion — the first drop in seven years — driven by rising defaults and high interest rates. Separately, as explained below, many retail investors are shifting to government bonds, while banks also prefer this route for its safety.

Of Note: Earlier in August, our writer Washington Mito analysed CBK data showing that nine banks had increased their lending rates in June despite a drop in the Central Bank Rate to 9.75%. These included Citi Bank (10.6%), Consolidated Bank (13.8%), and Bank of Africa Kenya Limited (18.21%).

Kenyans Double Investments in Govt Bonds & Unit Trusts Like MMFs

Kenyan investors — including individuals, companies, and self-help groups — are doubling down on investments in unit trusts such as MMFs and government bonds. A report by Business Daily indicated that these two investment classes more than doubled over the past two years, rising from Ksh580.45 billion in August 2023 to Ksh1.44 trillion.

Many people rushed to invest in bonds for their safety, especially during the youth-led protests of June 2024 and 2025, which made running businesses riskier. In 2023, bonds also offered higher returns of up to 18%. Historically, banks have also been major investors in bonds.

Kenya Spent 68% of Revenue on Debt Repayments in FY 2024/25

Kenya spent Ksh1.7 trillion on loan repayments and interest in the 2024/2025 financial year, equivalent to 68% of the Ksh2.5 trillion collected by KRA, according to a report by Controller of Budget Margaret Nyakang’o. The report shows that debt servicing accounted for 88% of the Consolidated Fund Services allocation, with Ksh744.93 billion going to principal repayments and Ksh996.86 billion to interest. Read More on Money254.

Meanwhile, Citizen TV reported that Nyakang'o raised a red flag after the government spent Ksh25 billion in travel in the last financial year alone.

Microfinance Banks Sell Loan Books Amid Rising Losses

Kenya’s 14 licensed microfinance banks (MFBs) are offloading part of their loan books to commercial banks as they battle rising defaults, shrinking deposits, and stiff competition, Business Daily reports. Data from the Central Bank of Kenya (CBK) shows the sector’s loan book contracted by 16.8% to Ksh31.2 billion in 2024, down from Ksh37.5 billion a year earlier, mainly due to loan sales. Despite these efforts, net non-performing loans rose to Ksh7.38 billion from Ksh6.37 billion, while reduced lending and interest income pushed the sector into a combined pre-tax loss of Ksh3.5 billion — its ninth consecutive year of losses.

According to Business Daily, only four MFBs — U&I, Caritas, Choice, and Sumac — posted profits last year, while the rest, led by Kenya Women, Faulu, and SMEP, recorded heavy losses. The sector continues to struggle against larger banks and digital lenders, while also cutting branches and agency outlets to reduce costs. Sustained losses and capital pressures have forced several MFBs, including SMEP, Maisha, Key, Century, Choice, and Uwezo, to cede stakes to new investors through acquisitions in recent years.

Kenyan Firms Accelerate Hiring Despite Tough Economic Conditions

Hiring by corporates in Kenya grew at the fastest pace in 15 months in August, signaling renewed confidence in future demand, according to Kenyans.co.ke. The latest Stanbic Bank Purchasing Managers’ Index (PMI) shows firms have sustained job creation for seven consecutive months despite weak household spending, high operating costs, and reduced output. While job creation remained mild, it was the fastest since mid-2024, with businesses also expanding inventories and cutting backlogs even as new orders contracted for the fourth straight month.

The August PMI reading rose to 49.4 from July’s 12-month low of 46.8, reflecting easing business declines. Agriculture, construction, and services sectors struggled with weak demand, high input costs, and unrest after protests in June and July, while manufacturing and wholesale & retail recorded growth. Optimism among firms reached a 30-month high, with many betting on marketing campaigns, new product launches, and branch expansions to drive growth over the next year.

Kenyan Court Grants VAT Exemption to Fintechs in Landmark Ruling

A Kenyan High Court has ruled that fintechs should be exempt from value-added tax (VAT) on payment services, overturning a Tax Appeals Tribunal decision in a case between Pesapal and the Kenya Revenue Authority (KRA), TechCabal reports. Justice Rhoda Rutto found that licensed payment service providers (PSPs) are “functionally equivalent” to banks, meaning they qualify for the same VAT exemptions as traditional financial institutions. The ruling dismissed KRA’s Ksh76.8 million claim against Pesapal and clarified that VAT exemptions apply based on the function of financial services, not the size or type of provider.

The judgment establishes a legal precedent by recognizing fintechs as providers of essential financial services, shielding them from significant tax liabilities and placing them on equal footing with banks and mobile money operators. Justice Rutto noted that the VAT Act does not restrict eligibility based on technology or licensing under the Banking Act, stressing that fintech activities—such as facilitating payments, processing funds, and executing instructions—mirror those of financial institutions, albeit digitally.

SGR Passenger Ticket Sales Hit Record Sh2 Billion in First Half of 2025

Passenger ticket sales on the Standard Gauge Railway (SGR) crossed the Sh2 billion mark in the first half of 2025, boosted by a rebound in traffic and higher fares, Business Daily reports. Kenya Railways Corporation (KRC) data shows ticket sales rose 11.65% to Sh2.07 billion between January and June, up from Sh1.85 billion over the same period last year, as 1.18 million passengers used the Madaraka Express trains. The rebound comes after passenger numbers slumped in early 2024 when fares were doubled, with first-class tickets from Nairobi to Mombasa raised to Sh4,500 and economy to Sh1,500.

KRC attributed the fare hikes to rising fuel costs, though the move initially triggered a dip in ridership as many travelers opted for cheaper road transport. The recovery in passenger revenue is expected to help KRC cover more of its operational costs and reduce reliance on Treasury bailouts, even as SGR services continue to fall short of generating enough income to repay the multi-billion-shilling Chinese loans used to build the railway. The resurgence also comes as the government plans to extend the SGR line from Naivasha to the border town of Malaba.

Kenya’s Match Masters Sues Tanzania Over New Import Tax

Kenyan safety matches manufacturer Match Masters has sued Tanzania at the East Africa Court of Justice (EACJ), challenging a new import tax it says violates East African Community (EAC) common market rules, Business Daily reports. The company argues that Tanzania’s Finance Act, 2025, which imposed a Sh20.70 excise duty per kilogramme of imported match boxes, has unfairly raised its prices by Sh103.52 per carton, making its products less affordable in the Tanzanian market. Match Masters’ Managing Director Kushal Shah said the levy was discriminatory and risks cutting off low-income citizens from affordable matches they have relied on for 23 years.

The dispute comes amid wider trade tensions between Kenya and Tanzania, with Nairobi recently objecting to new Tanzanian business rules and tax measures it deems discriminatory. Kenya’s Trade and Industry CS Lee Kinyanjui warned the measures have increased the cost of doing business by up to 25% for Kenyan traders, urging Tanzania to reconsider in the spirit of regional integration. Despite ongoing friction, trade between the two countries stood at Sh125.9 billion in 2024, with Kenya exporting Sh67.2 billion worth of goods against imports of Sh58.7 billion.