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Why banks make more money when interest rates are high and what that means for you
03rd July, 2026 06:54 PM
When the Central Bank raises its benchmark interest rate, many people expect the change to affect everyone equally. In reality, borrowers and savers often feel the impact very differently.
For banks, higher interest rates can create an opportunity to earn more from loans. For customers with money in savings accounts, however, the benefits may take longer to appear, if they appear at all.
The difference lies in how quickly banks adjust the rates they charge borrowers compared with the rates they pay depositors.
The gap that makes banks money
Banks make money by taking deposits from customers and lending part of that money to individuals, businesses and government institutions. They pay interest to customers who keep money in savings or fixed deposit accounts. At the same time, they charge a higher interest rate to customers taking loans.
The gap between what a bank earns from lending and what it pays for deposits is known as the net interest margin. For example, if a bank charges 18 per cent on a loan but pays 7 per cent on deposits, the difference gives the bank room to cover costs, deal with loan defaults and still make a profit.
When interest rates rise, lending rates can move up quickly, especially for variable-rate loans. Deposit rates, however, may remain low for longer. This allows banks to widen the gap between lending and deposit rates.
According to the World Bank, commercial banks’ lending and deposit rates do not always move at the same speed. Lending rates may rise faster during a high-rate period, allowing banks to earn more from the difference between loans and deposits.
Why savers may not feel the benefit immediately
A higher benchmark rate does not automatically mean that every savings account will start earning more interest.
Many ordinary savings accounts pay very low rates, even when the cost of borrowing has gone up. Banks may raise rates on fixed deposits or large deposits, but customers with smaller balances may not receive the same treatment.
This means that money left in a low-interest account can lose value over time, especially when the cost of food, rent, transport and other basic needs is rising. If inflation is higher than the interest earned on savings, the money may grow on paper but buy less in real life.
For instance, a saver earning 4 per cent interest while prices are rising by 6 per cent is effectively losing purchasing power.
The Kenya National Bureau of Statistics regularly tracks inflation through the Consumer Price Index, which measures changes in the prices of goods and services bought by households.
What deposit holders should do
High-rate periods are a good time for savers to review where their money is sitting.
Instead of leaving large amounts in an ordinary savings account, customers can ask their banks about fixed deposit accounts, which may offer better returns for money locked away for a set period.
It is also worth comparing deposit rates across different banks. Some lenders offer higher rates to attract customer deposits, particularly for fixed deposits and larger balances.
However, savers should not move money based on interest rates alone. It is important to consider access to funds, account charges, minimum balances and whether the money may be needed in an emergency.
The Kenya Deposit Insurance Corporation advises customers to understand the terms of their bank accounts and confirms that deposits in member institutions are protected up to the legally prescribed limit.
Borrowers need to watch the fine print
For borrowers, high interest rates can make loans more expensive. Monthly repayments may increase, particularly for loans linked to changing market rates.
Kenya’s revised loan pricing framework uses the Kenya Shilling Overnight Interbank Average, known as KESONIA, as the base rate for variable-interest loans, with an additional premium based on the borrower’s risk profile. This means a customer’s repayment history and credit record can affect the final interest rate charged.
When rates rise, banks may earn more from the gap between loans and deposits. Savers should therefore pay closer attention to where their money is kept and whether it is earning enough to protect its value.
