“I think the KBBR is now being taken as a marketing tool but I think that is where it begins and it is a good sign,” Mwai said.

The KBRR was introduced by policymakers at 9.13 per cent to act as the new base rate of all commercial banks’ lending rates that was later revised this year to 8.54 per cent. The KBRR tracks the CBR as well as the weighted 2-month moving average of the 91-day Treasury Bill and will be reviewed twice a year.

However, since its introduction only two banks have complied lowering their interest loans by a slight margin. Standard Chartered became the first lender to reduce its interest loans to 10.9 per cent from 12.9 per cent last year for a limited period of 45 days.

Barclays Kenya which has a heavy presence in corporate and retail lending is the latest institution to lower its rates by a marginal 0.6 per cent to 11.9 per cent which is 3.36 per cent higher than the new set KBBR.

“It is encouraging that some of the banks have adopted it even if it is more of a marketing approach as opposed to a wholesale policy approach,” Mwai said.

The KBRR was introduced June last year to enhance transparency in the pricing of credit as well as improve the transmission of monetary policy signals.

“I think partly the banks are still testing the market with KBRR so they do not want to give a blanket offer because you will see that when they do KBRR plus a margin, you find that most of them will retain the option of adjusting that margin which really should not be the case because that should have been fixed for the period of the loan,” Mwai explained.

Meanwhile, international ratings agency Moody’s has warned that Kenya’s low interest rate will have an impact on the profitability of Kenyan banks.

“The lower rate will have an immediate effect on the portion of floating-rate bank loans that charge the KBRR,” Moody’s noted in a statement.

“These loans will be re-priced, reducing banks’ interest rate spreads, since banks’ cost of funding, which is not linked to the KBRR, will likely remain broadly stable. We also expect to see declining rates affect most of the remainder of Kenyan banks’ lending portfolios.”

Nevertheless, the agency expects that Kenyan banks’ profitability will remain resilient despite declining margins.

“In addition, a gradual reduction in lending rates, in addition to a lower cost of living given declining oil prices, will support borrowers’ loan repayment capacity, easing loan-loss provisioning needs,” the agency said.