Tier one lender Co-operative Bank of Kenya (Co-op Bank) has cut its loan interest rate by one percentage point, stunning the credit market as rivals race in the opposite direction to hike rates.

In the move that comes as huge relief for its credit-reliant borrowers amid a biting cash crunch, Co-op Bank said it had slashed personal loans and asset finance lending rates to "selected key borrowers"from 14 per cent to 13 per cent per annum with effect from April 1.

The reduction in lending rates will benefit customers who have maintained good credit record over time, the lender said in a statement on Thursday.

Co-op Bank cited the check-off personal loans to key institutional employees including teachers, security agencies and other State corporations who borrow against the strength of their payslips and are perceived to be less risky.

"Co-op Bank’s reduction of the lending rate is the bank’s response to the good loan repayment record and reduced default risk that the target check-off scheme loans have recorded over time," the lender said in a statement.