Banks have slashed interest for customer savings to an average of 5.7 percent, which is the lowest in 15 months, following the removal of the floor interest rate last year.
Latest data from Kenya National Bureau of Statistics (KNBS) shows the rates declining month-on-month up to October after the high of 7.01 percent seen in February last year, leading to narrower margins to savers.
This means between February and October, customers have seen a 131 basis point haircut, raising a concern of more reductions in the absence of compulsory minimum rate.
Last August, the National Assembly voted to tweak the Banking (Amendment) Act, 2016 and removed a clause compelling banks to pay depositors at least 70 per cent of the Central Bank of Kenya (CBK) base rate.
Failed to unlock credit
The removal of the floor on deposit rate and retention of a ceiling on lending rate has failed to unlock credit to the private sector though.
The CBK data shows that private sector credit grew by 2.4 percent in the 12 months to December 2018, compared to three per cent in November.
Analysts from Genghis Capital, an investment bank, say the amendment of the law has failed to offer motivation for banks to lend more as may have been anticipated by Parliament.
Inasmuch as the floor was removed, it has not had the desired impact of creating headroom for banks to lend, according to Genghis' senior research analyst Churchill Ogutu.
Genghis head of research Joy D'Souza adds that before the lifting of the floor, many banks had restructured their liabilities so that the portion that attracted interest was so little.
"We saw banks like KCB #ticker:KCB and Stanbic, which have a huge chunk of corporate clients, restructure how they categorise different deposits, which meant that what was termed as fixed deposits was only a small portion of the books," said Ms D'Souza.