Credit Is Recovering, but Kenyan Banks Are Still Lending Selectively

Executive summary

Kenyan bank lending is recovering. Private-sector credit grew by 9.3% in the year to May. After allowing for inflation, real credit growth was about 2.4%. Real credit growth means lending is increasing faster than prices.

Borrowing has also become cheaper. The average bank lending rate fell to 14.38% in June. Lower Central Bank rates are therefore reaching customers, although slowly and unevenly.

The recovery is not broad. Trade and construction received about 54% of the net increase in outstanding credit during the year to May. Manufacturing and transport recorded lower loan balances. Banks appear more willing to finance businesses with quick and visible cash flows than long-term industrial projects.

Bad loans remain the main balance-sheet risk. The industry's non-performing-loan ratio - the share of loans on which borrowers have fallen seriously behind - declined to 15.3% in May. Some of this improvement came from recoveries and write-offs, not only from borrowers returning to normal payment.

The overall assessment is mixed, with a positive tilt. Banks have deposits, liquidity and capital to support more lending. Their ordinary lending income is improving. However, credit quality remains weak and corporate-bond financing is still limited and difficult to track.

Readers should watch the next Central Bank decision, second-quarter bank results, manufacturing credit and whether announced private-credit facilities result in actual loans to Kenyan businesses.

What this means to investors

Bank profitability should remain supported by recovering loan growth, lower deposit costs and rising fee income. A compilation of first-quarter results from ten listed banks showed net interest income rising by 10%. Fees and commissions also increased. However, government securities remain an important source of earnings: listed banks' holdings grew by almost one-quarter.

This means bank profits are not proof that productive business lending is healthy. Investors should examine where each bank earns its income, which sectors it lends to and how much it sets aside for possible loan losses.

Bank balance sheets have meaningful protection. System liquidity was well above the regulatory minimum. Disclosed capital ratios for listed banks also remained above their required levels. Provisions - money charged against profit to absorb expected loan losses - covered about 72% of listed-bank bad loans. Even so, protection differs between banks, and industry bad loans remain high.

Businesses and households should benefit from lower interest rates. New variable-rate Kenya-shilling loans now use a common market reference rate, making pricing easier to compare. But a lower reference rate does not guarantee an affordable loan. Banks still add a charge based on the customer's risk, their costs and their required return.

Consumer-facing companies may benefit if cheaper loans support household spending. Construction and agricultural businesses are already receiving more credit. Manufacturers face more pressure because their outstanding bank borrowing has declined despite the wider credit recovery.

Corporate-bond investors face both default risk and liquidity risk. Liquidity risk means an investor may struggle to sell a bond quickly. A high coupon - the bond's stated interest payment - is compensation for risk. It is not evidence that the investment is safe.

Market at a glance

WHAT THIS TELLS US Kenyan banks have enough deposits and liquidity to lend more. Credit is now growing faster than inflation, but the margin is modest. The main constraint is no longer a system-wide shortage of bank funding; it is borrower risk and banks' willingness to lend.

Headline lending accelerated, but real credit growth slowed

Figure 1. Headline lending accelerated, but real credit growth slowed.

WHAT THIS TELLS US The rebound in bank lending is confirmed, but inflation absorbed more of the improvement than before. Borrowers have access to a larger pool of credit in nominal terms, yet the expansion in purchasing power remains modest.

Source: Central Bank of Kenya data; Serrari calculations.

What changed?

• 1Credit growth accelerated. Outstanding private-sector bank credit increased by a net KSh360.6 billion in the year to May. The comparable increase one year earlier was KSh75.2 billion. This is the change in loan balances after repayments, write-offs and other adjustments. It is not the same as the total value of fresh loans approved or paid out. The increase is nevertheless strong evidence that the credit contraction has ended. It should support working capital, household purchases and some business expansion.

• 1New credit was heavily concentrated. Trade accounted for a KSh153.5 billion increase in outstanding credit. Construction added KSh42.0 billion, agriculture KSh46.6 billion and household borrowing for consumer goods KSh42.1 billion. Manufacturing credit fell by KSh38.6 billion. Transport and communications borrowing also declined, while real-estate lending was broadly unchanged. Trade businesses benefit most from the present recovery. Manufacturers may find it harder to finance machinery, production capacity and long investment cycles.

The credit recovery is concentrated in trade and shorter-cycle activity

Figure 2. The credit recovery is concentrated in trade and shorter-cycle activity.

WHAT THIS TELLS US Banks are favouring sectors with shorter and more visible cash cycles. The fall in manufacturing balances suggests that the recovery has not yet become a broad investment cycle.

Source: Business Daily analysis of Central Bank sector data.

• 1Borrowing rates continued to fall. The average lending rate declined to 14.38% in June, from 14.50% in May and a recent peak above 17% in late 2024. Interest-rate changes have therefore reached borrowers, but not fully. The Central Bank's policy rate has fallen more sharply than the average customer rate. Variable Kenya-shilling loans now use the Kenya Shilling Overnight Interbank Average rate, commonly called KESONIA. This is the average overnight interest rate at which banks lend to each other. Banks add a customer-specific charge to this reference rate. The new rules improve transparency but do not remove borrower risk charges. (Source: Kenya banking-law update on KESONIA pricing.)

• 1Bad loans fell, but the improvement needs careful reading. Gross bad loans declined to KSh694.8 billion in May, from KSh728.2 billion a year earlier. The bad-loan ratio fell to 15.3%. Recoveries helped. Banks also wrote off KSh75.1 billion during 2025. A write-off removes a loan from the main balance sheet after the bank accepts that collection is unlikely. It does not mean the borrower paid. Growth in the total loan book also reduces the bad-loan percentage even if the underlying problem loans change little. The decline is positive, but it should not be treated as a complete return to health.

Liquidity improved while the bad-loan ratio eased only slightly

Figure 3. Liquidity improved while the bad-loan ratio eased only slightly.

WHAT THIS TELLS US Banks have a strong system-wide cash buffer, but the quality of their loan books remains the more important risk. A small fall in the bad-loan ratio is encouraging, not conclusive.

Source: CBK indicators; Reported write-offs and recoveries.

• 1Public corporate-debt activity remained limited. The reviewed Capital Markets Authority and Nairobi Securities Exchange records did not confirm a major new public corporate-bond issue completed between May and July. Existing bonds and approaching maturities therefore matter more than confirmed new issuance. Family Bank's 13% note, originally issued in 2021 to support lending and technology investment, matures in December 2026. This is existing debt, not new money raised in 2026. (Source: Family Bank issue record.)

Why did it happen?

The first cause was lower Central Bank interest rates. The policy rate has fallen from 13% in mid-2024 to 8.75%. This reduced banks' short-term funding costs and allowed customer rates to decline.

The second cause was strong deposit funding. System deposits rose to KSh6.39 trillion by February. Banks were using roughly KSh69 of gross loans for every KSh100 of deposits. This provides room to lend without relying heavily on expensive wholesale funding.

The third cause was careful borrower selection. Banks directed more credit to trade, agriculture and construction, where sales or project cash flows may be easier to observe. They remained cautious about manufacturing and transport, where energy, imported inputs and long repayment periods can raise risk.

The fourth cause was balance-sheet clean-up. Recoveries and write-offs reduced reported bad loans. A larger total loan book also improved the bad-loan ratio.

Finally, banks continued to find government securities attractive. A compilation of first-quarter listed-bank results showed government-security holdings rising by 24.9%. These assets support interest income and liquidity, but they can also reduce the urgency to make riskier business loans. (Source: Compilation of listed-bank first-quarter results.)

Who benefits and who faces pressure?

WHAT THIS TELLS US The credit recovery favours businesses with short and visible cash cycles. Companies that need long-term investment finance remain less well served. Banks benefit from the recovery, but the benefit will last only if new lending performs better than the older loan book.

Where is money moving?

Confirmed bank credit: The net increase in outstanding credit was concentrated in trade, construction, agriculture and consumer goods. Trade alone accounted for more than two-fifths of the increase. This supports working capital and shorter-term activity more clearly than long-term industrial expansion. Falling manufacturing and transport balances suggest that capital is not yet moving broadly into production capacity.

Deposits: Official data confirms that bank deposits increased. A compilation of listed-bank results also showed deposit growth of 14.6% in the first quarter. Public aggregate data does not identify which household, business or institutional group supplied most of that increase. The strongest source of deposit growth therefore cannot be stated confidently.

Government securities: Listed-bank balance sheets show a substantial rise in government-security holdings. This is a confirmed balance-sheet shift, although it is not transaction-level evidence of exactly when the purchases occurred.

Corporate bonds and commercial paper: No major new completed public issue was confirmed during the review period. Commercial paper - short-term company debt - is often privately placed, and detailed transaction information is not consistently public. It is therefore not possible to confirm whether private commercial-paper borrowing expanded.

Private credit: Standard Chartered and the International Finance Corporation announced a regional supply-chain facility covering Kenya and seven other African markets. It could eventually support agriculture, healthcare and manufacturing. However, no Kenya-specific allocation or disbursement was publicly reported. It is an established regional facility, not confirmed money already received by Kenyan companies.

Bank ownership: Absa Group's offer to increase its stake in Absa Bank Kenya and Nedbank's proposed purchase of control in NCBA show strong foreign strategic interest. These are purchases of existing shares. They do not automatically provide new lending capital to the Kenyan banks. The Nedbank transaction also remains subject to final approvals.

Announced finance is not the same as money received

Figure 4. Announced finance is not the same as money received.

WHAT THIS TELLS US The clearest confirmed movement is through bank balance sheets, especially into trade. Corporate-debt and private-credit announcements should not be counted as financing delivered to Kenyan companies until transactions and disbursements are disclosed.

Source: Regional supply-chain finance facility; Nedbank-NCBA transaction update.

What could change this view?

The base case is a continued but selective credit recovery. Lending rates should decline gradually, while banks remain cautious about sectors with weak cash flow or high existing debt.

The positive possibility is a broader recovery. This would require manufacturing, transport and property credit to begin growing without a renewed increase in bad loans. Completed corporate-bond or private-credit transactions used for new investment would also strengthen the outlook.

The main negative possibility is a rise in inflation, energy costs or business weakness. This could slow interest-rate reductions and make existing loans harder to repay.

The conclusion would change materially if:

• Private-sector credit growth remained above 10% while real credit growth exceeded 3%.
• Manufacturing recorded several months of positive net credit growth.
• Both the value and percentage of bad loans fell without unusually large write-offs.
• Average lending rates moved sustainably below 14%.
• Companies completed sizeable debt issues and disclosed that the proceeds financed expansion rather than replacement of maturing debt.

What to watch next

WHAT THIS TELLS US The next evidence should come from bank results and regulatory decisions, not market rumours. Credit quality, loan pricing and completed financing transactions will matter more than announcements alone.

Final Desk takeaway

Kenya's banking system is liquid, deposit-funded and capable of providing more credit. Lending is growing faster than inflation, customer rates are falling and reported bad loans have started to decline.

The recovery is still incomplete. Much of the increase in outstanding credit has gone to trade, construction and agriculture. Manufacturing and transport have not shared fully in the improvement. Bad loans remain high, and part of the decline reflects write-offs and a larger loan book.

For investors and business owners, the key question is no longer whether lending has restarted. It has. The question is whether it can spread into productive, long-term investment without creating another cycle of unpaid loans. Corporate-debt announcements should be treated cautiously until money is confirmed as raised and disbursed.

Sources

Central Bank of Kenya indicators

June 2026 CBK bulletin

February 2026 banking indicators

Central Bank of Kenya data; Serrari calculations

Business Daily analysis of Central Bank sector data

Kenya banking-law update on KESONIA pricing

Reported write-offs and recoveries

Family Bank issue record

Compilation of listed-bank first-quarter results

Regional supply-chain finance facility

Nedbank-NCBA transaction update

Important notice: This publication provides general market information. It is not personalised investment advice or a recommendation to buy, sell or hold any security.