Kenyan banks face a lower-rate squeeze as digital customers and payments gain ground

Kenyan banks are finding that the maths of banking looks different as interest rates come down. Loan yields are falling, yet lenders still need to grow earnings, protect margins and generate enough returns on the capital sitting on their balance sheets. That is putting more attention on cheaper deposits, payments, digital customers and the technology that can help banks serve larger volumes without adding costs at the same pace.

The first-quarter 2026 results of the country’s eight listed banks show how uneven that adjustment has become. Loan books expanded, but the gains were not simply a product of lending more money. Some banks protected net interest income by cutting funding costs, others leaned on fee income or operating efficiency, while several were still carrying the cost of investing in new digital capabilities. For Kenyan banks adapting to lower interest rates, the question is how much economic value they can extract from the wider customer relationship rather than the loan alone.

That helps explain why payments, digital onboarding, merchant platforms and data systems are becoming more important to the banking story. These technologies can bring deposits into the institution, increase transaction activity, improve lending decisions and reduce the cost of serving customers, but the investment only pays off when the resulting scale translates into stronger income or better efficiency.

Lower rates are changing the banking equation

The Central Bank of Kenya’s easing cycle has brought average lending rates down to 14.7% in March 2026 from 15.6% a year earlier, while private-sector credit growth recovered to 8.1%. The listed banks grew their loan books by an average 11.2% in the first quarter, suggesting that credit demand was recovering even as the income earned from each shilling lent came under pressure.

That changes the importance of funding costs. NCBA’s net interest income rose 22% after its interest expense fell 23.3%, with cheaper current and savings deposits replacing more expensive term funding. I&M recorded 31.1% NII growth, driven primarily by stronger interest income, although its costs and provisions also rose sharply. Equity and Co-operative Bank recorded EPS growth of 24% and 21.2% respectively, while KCB remained the largest NII generator among the eight banks.

The figures show why deposits are becoming as important as loans. A bank that can acquire and retain low-cost transaction balances has more room to lend without paying as much for funding, while a bank that relies heavily on expensive deposits can lose some of the benefit of higher loan volumes. Digital acquisition and payments therefore matter to the income statement even when the immediate product is not a loan.

Digital payments are becoming a revenue battleground

Kenyan banks are competing for the transactions that sit around their lending businesses. TechTrends reported in July that contactless cards, QR payments and instant bank transfers were expanding alongside greater interoperability between banks, SACCOs and mobile wallets. APIs are also connecting financial services to accounting, payroll, e-commerce and merchant systems.

That matters because payment activity can deepen a customer’s relationship with a bank without requiring another loan. A merchant that receives collections through a bank, pays suppliers through it, manages payroll through it and holds working capital there gives the institution several opportunities to earn fees, retain deposits and understand the underlying business.

NCBA’s revised PesaLink pricing illustrates the push to make digital transfers part of everyday financial activity. The bank introduced free interbank transfers up to KSh1,000 and a flat KSh20 charge above that threshold, joining a wider group of banks pursuing simpler pricing for digital payments.

The competitive field also extends beyond banks. Kenya’s mobile-money market continues to expand, while the physical agent model is changing as more transactions move directly through digital channels. TechTrends reported that mobile-money subscriptions reached 54.01 million in the quarter ended June 2026, even as registered agents fell 5.6% to 568,463. The figures point to a market where digital accounts and transaction activity can grow without a matching expansion in physical distribution.

For banks, that creates a competitive question below the headline lending rate: who owns the customer’s everyday financial activity?

Banks are building around data and digital customers

I&M provides one of the clearest examples of how this is playing out. TechTrends reported in September that about 25,000 people open an I&M account each month without visiting a branch, while roughly 85% of its retail accounts are opened digitally. Customers can complete onboarding using a national ID and smartphone, with a liveness check used for identity verification.

The more significant part of the strategy comes after account opening. I&M says about 90% of its customers are now digitally active, allowing the bank to use in-app behaviour alongside credit-reference information and income proxies in its lending models. Its digital short-term loan has disbursed close to KSh700 million in Kenya, while its Kamilisha overdraft service in Tanzania has reached about seven million Airtel subscribers.

This connects directly with the pressure visible in the Q1 financial results. I&M delivered strong NII growth, but its operating costs grew substantially faster than revenue as the bank expanded its branch and digital capabilities. The return on that investment therefore depends on whether the infrastructure can support a much larger customer and transaction base without costs rising at the same rate.

Digital banking does not automatically mean cheaper banking. Building reliable channels, data platforms, cybersecurity controls, identity systems and customer-service infrastructure costs money. The payoff comes when those systems allow a bank to acquire customers at lower unit cost, serve more of them without adding equivalent physical capacity, make better credit decisions and generate more transactions from each relationship.

I&M’s approach also illustrates why data governance becomes part of the commercial infrastructure. The bank has enterprise data, analytics, engineering and governance functions, while fintech partners are required to meet standards around customer information. As digital lending expands, the quality and permitted use of data become just as important as the algorithms processing it.

Fintech partnerships are extending the banking relationship

KCB’s investment in Pesapal provides another example. The bank is acquiring a 22.23% stake in the payments company, giving it exposure to a business operating across Kenya, Uganda, Tanzania, Rwanda and Zambia. TechTrends reported that Pesapal’s technology connects payments with functions such as ordering, billing, inventory and settlement, placing the platform closer to merchants’ daily operations.

The significance for a bank goes beyond payment fees. A merchant platform can provide information about sales, transaction patterns and business activity, creating a more detailed view of an enterprise than a conventional banking relationship may provide. That information can potentially support working-capital finance and other SME products.

KCB has already demonstrated this model through its work with Pesapal in the fuel sector. The two companies have targeted fuel dealers with payment and forecourt-management technology alongside KCB financing, linking business operations to financial services.

The investment also sits alongside KCB’s acquisition of a 75% stake in Riverbank Solutions, a technology company involved in agency banking, revenue collection, payments and business-management services. Taken together, the transactions show a bank extending its digital footprint into infrastructure that connects businesses, merchants and financial services.

The opportunity is particularly relevant to SME banking. Payments can generate information about a business’s cash flows, while financing can be attached to the same commercial relationship. That creates a broader financial-services loop in which payments, data and credit reinforce one another.

Technology has to deliver operating leverage

The financial results show why the cost side of digital banking matters.

Stanbic’s operating expenses fell 7.8% in the first quarter, producing a 12.1 percentage-point positive JAWS measure as income rose 4.3%. Its core banking upgrade and continued digital migration were identified as contributors to the lower cost base. That is a more meaningful technology story than simply reporting higher app usage because the investment is connected to the economics of running the bank.

Other lenders illustrate the opposite challenge. I&M’s operating expenses grew substantially faster than revenue as it expanded its branch and digital capabilities, while KCB also increased spending on people and technology. Technology investment can therefore improve efficiency, but the financial benefit may arrive only after the underlying infrastructure reaches sufficient scale.

This becomes more important as interest income becomes harder to grow through pricing alone. A bank can compensate for a lower margin by increasing transaction volumes, acquiring more deposits, automating servicing and reducing the cost of each customer interaction. If the cost of achieving that volume rises just as quickly, however, the benefit of scale becomes much smaller.

The competitive advantage therefore sits in the combination of technology and operating discipline. A modern banking platform that costs too much to run does not solve the margin problem; a lower-cost platform that cannot attract customers or generate transactions does not solve it either.

Credit quality remains the other side of digital growth

The pressure to expand lending also comes with a significant risk constraint. All eight listed banks reduced their gross NPL ratios in the first quarter, although asset quality remained a concern across the sector.

KCB reduced its gross NPL ratio from 22.9% to 18%, while Equity moved from 16.5% to 12.5%. Standard Chartered’s ratio fell from 8.9% to 5.4%. The three banks together removed roughly KSh42 billion in stressed loans from their books during the quarter.

The improvement gives banks more room to expand lending, but it also shows why digital credit cannot be reduced to faster loan approvals. Better data, automated underwriting and digital collections can improve the economics of lending, but they do not remove the need for sound credit assessment.

That is particularly important as banks compete with digital lenders and fintechs for borrowers. A faster application process can increase volumes, but if underwriting quality deteriorates, provisions can erase the income gained from additional lending. I&M and NCBA both recorded higher costs of risk in the quarter despite strong net interest income growth.

The technology opportunity is therefore tied to the quality of decisions it enables. Banks need systems that can process more customers while identifying repayment capacity, fraud and emerging credit problems early enough for lenders to act.

Capital allocation is becoming part of the technology story

The pressure on bank margins also intersects with capital allocation. FY2025 dividend per share rose 133.3% at KCB, 66.7% at Co-operative Bank and 35.3% at Equity. NCBA increased DPS by 29.1%, while Standard Chartered reduced its dividend by 31.1% and recorded a 95.4% payout ratio.

The issue is larger than dividends. Retained earnings provide part of the capital banks use to support future balance-sheet expansion, technology investment and lending capacity.

TechTrends reported in September that the Central Bank of Kenya had proposed capital-linked dividend rules under which banks with weaker CET1 positions would have to retain a greater share of earnings. Banks below a CET1 ratio of 8.625% would be required to retain all earnings under the proposed framework, with progressively lighter restrictions applying to better-capitalised institutions.

That makes the allocation of earnings relevant to technology strategy. A bank expanding its digital infrastructure, payments capabilities and data systems needs capital to support the wider balance sheet and absorb the risks associated with growth. At the same time, shareholders expect profitable institutions to return capital.

The balance between those priorities becomes more significant if banks continue expanding loan books while lending yields remain under pressure.

The banking model is getting wider

The Q1 numbers suggest that Kenya’s banking competition is moving beyond the traditional contest for loan customers. Lower rates reduce the income banks can extract from each unit of lending, which raises the value of cheap deposits, payment transactions, merchant relationships, digital distribution and better use of customer data.

The technology landscape reflects that change. Absa Bank Kenya launched Absa Next in September, combining banking, savings, investments, loans and lifestyle services in one digital platform. The app also uses alternative credit scoring and open-banking features, allowing customers to bring accounts from other financial institutions into a single view.

Equity has also added biometric authorisation for payments through facial recognition and fingerprint verification, bringing identity and transaction security deeper into its mobile banking experience.

These developments point to a broader competition around the customer relationship. Banks want to own more of the financial activity taking place around a customer, from the initial account and deposit to payments, savings, investments and credit. The technology enables that relationship, but the financial value depends on whether the additional activity produces sustainable revenue or lower operating costs.

That is why the Q1 numbers should be read alongside the technology investments taking place across the sector. Equity and Co-operative Bank combined earnings growth with improving returns, while KCB maintained its scale and expanded its fintech footprint. I&M is investing heavily in digital acquisition and data-led lending, while Absa is building an integrated digital proposition. Stanbic provides evidence that technology investment can also feed through to operating efficiency.

Kenya’s banks are still lending institutions, and interest income remains central to their economics. But the lower-rate environment puts a higher value on everything surrounding the loan: the deposit that funds it, the payment account that keeps the customer active, the merchant platform that reveals business activity, the data that informs the credit decision and the technology that keeps the cost of serving that customer under control.

The banking technology story is therefore becoming a financial economics story. The banks that build digital scale will still need to prove that scale can translate into cheaper funding, more transactions, better credit decisions and lower unit costs. As lending yields continue to face pressure, those connections will matter as much to earnings as the loan book itself.

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