East African banks are preparing for significant revenue adjustments in 2025 as central banks across the region implement interest rate cuts to promote private sector investment and stimulate economic recovery. While these measures aim to boost economic activity, they also compress returns on government securities and loans, key revenue sources for many financial institutions.
The recent monetary policy changes present a dual challenge for East African banks: fostering loan growth while contending with reduced returns on government securities. According to Fitch’s African Banks Outlook 2025, the decline in interest rates will likely erode income for banks heavily reliant on fixed-income investments. This economic environment is further complicated by risks such as sovereign debt distress, currency volatility, and regulatory challenges.
Kenyan banks, for instance, face heightened vulnerabilities due to high impaired loan ratios linked to unresolved public-sector bills. Additionally, net interest margins (NIMs) are forecast to contract in 2025, limiting profitability. However, diversified income streams and operational efficiency are expected to partially offset these pressures.
Central banks in the region have adopted varied approaches to interest rate management. In December 2024, Kenya’s Monetary Policy Committee lowered the benchmark lending rate to 11.25%, its third rate cut of the year, driven by declining inflation rates that reached a 17-year low of 2.8% in November. Despite this, commercial banks have been slow to adjust lending rates, tempering the anticipated economic stimulus.
Similarly, Uganda’s Central Bank maintained its policy rate at 9.75%, signaling a preference for stability in lending and exchange rates. Rwanda’s central bank held its key rate at 6.5% in November to manage inflation, while Tanzania’s Central Bank kept its benchmark rate steady at 6%, anticipating inflation to align with its 5% target. These strategies aim to support growth while safeguarding financial stability, though the impact on banking profitability remains uncertain.
Despite mounting challenges, leading East African banks have reported robust earnings from government securities. Kenyan Tier 1 banks, including Equity Group, KCB, DTB, Co-operative Bank, and I&M Bank, collectively earned $855.73 million in the first half of 2024. This marks a 17.87% increase from the previous year, with Equity Group leading the pack at $219.53 million, followed by KCB at $197.44 million.
However, Fitch warns that declining yields on government securities will likely impact profitability in 2025. Moody’s also flagged concerns in mid-2024, downgrading the credit ratings of major Kenyan banks due to their significant exposure to government-issued securities amid fiscal vulnerabilities. These challenges highlight the sector’s susceptibility to sovereign risk.
The close ties between banks and governments in East Africa have led to a “crowding out” effect, where resources are diverted from private sector financing to support sovereign debt. The European Investment Bank has identified this as a critical issue, particularly given elevated sovereign debt risks.
Despite these challenges, falling interest rates may spur increased loan demand, creating opportunities for banks to offset declining revenues from fixed-income investments. Fitch’s Eric Dupont notes that the solid business models and resilience of East African banks will enable them to absorb losses while maintaining substantial revenue streams.
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