Borrowers should not expect interest rates on loans to instantly drop despite Central Bank's cut on its base lending rate last week, according to the Kenya Bankers Association.

KBA yesterday said most banks have to wait until their cost of funds drop before they pass on the benefit of lower lending rates to their customers.

The Central Bank cut the rate it uses to lend banks by 3.5 percentage points to 13 per cent from 16.5 per cent but the banks say the money they lend relates to the deposits they take. "Lower CBR affects the market, enabling banks to pick cheaper deposits from which they will then loan to customers at a lower rate," said Habil KBA chief executive Habil Olaka.

Olaka defended the delay between the decline in the CBR and the banks' response. In most cases the banks take longer to reduce rates compared to when there is a rate increase.

The disclosure from KBA came as CfcStanbic announced it will reduce in its base lending rate from 22.5 per cent to 19 per cent from October 15.

Barclays, on Friday, said the sector is reviewing the interest rates in line with the CBK reduction, but did not give a specific timeline.

"To gain a competitive advantage, some banks will lower their lending rates faster, even before their deposit rates drop while others would wait for their deposit rates to drop, before they transmit it through reduced lending rates,"Olaka said. He claimed more than 12 banks are lending at a lower rate, but could not name any. "Some of them are engaging directly with their customers as opposed to making announcements," he added.

The Monetary Policy Committee based the CBR cut on falling inflation and a stable exchange rate saying the economy needs some boost.

Overall inflation declined last month to 6.09 per cent, the lowest level this year while the shilling has achieved some stability around 84 against the US dollar. The demand for credit, according to CBK second quarter figures, has remained stagnant due to the then prevailing high cost of borrowing where some banks are still charging as high as 30 per cent on loans.