Kenya’s National Treasury has found itself in an unexpected position: investing billions of shillings meant for public officers’ car loans into Treasury Bills because demand for the loans has sharply declined.

As of June 30, 2025, the State and Public Officers Motor Car Loan Scheme held a balance of Sh4,355,166,574 — funds that were largely unutilized due to a sustained drop in applications. Rather than allow the capital to remain idle, the Treasury redirected it into short-term government securities.

On paper, the move appears fiscally prudent. Idle funds earn no return; Treasury Bills generate yield. But the decision also highlights deeper economic pressures affecting Kenya’s public sector workforce — from rising statutory deductions to strained disposable incomes.

The story is not merely about Sh4.3 billion parked in money market instruments. It reflects broader themes:

• Declining borrowing appetite among civil servants
• Structural pressure on household cash flows
• The interaction between fiscal policy and employee welfare
• The unintended consequences of mandatory deductions

To understand the implications, one must examine the scheme’s original intent, its utilization trends, and the evolving financial realities facing Kenya’s public servants.

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The Car Loan Scheme: Origins and Purpose

The State and Public Officers Motor Car Loan Scheme was established in September 2015 to provide affordable vehicle financing to government employees.

The rationale was straightforward:

• Improve mobility for public officers
• Enhance service delivery efficiency
• Provide subsidized financing options
• Reduce reliance on expensive commercial loans

Such schemes are not unique to Kenya. Globally, governments often offer subsidized loans to public employees as part of compensation frameworks.

In Kenya’s case, the scheme was structured to:

• Offer competitive interest rates
• Spread repayment over manageable periods
• Deduct repayments directly from salaries

At inception, the program aimed to balance employee welfare with financial discipline.

Utilization Data: A Sharp Contrast

Since its inception in 2015:

• Total motor car loans processed: Sh824,260,060
• Total applicants approved: 389

During the 2024/2025 financial year:

• 113 applications processed
• Sh234,560,866 disbursed
• Sh148,395,403 repaid

These figures suggest some ongoing activity. However, compared to the Sh4.3 billion sitting unused, demand is markedly lower than the scheme’s available capacity.

In her report, Auditor-General Nancy Gathungu noted that the low response compelled management to invest the funds in Treasury Bills to prevent idle balances.

The concern, however, is structural:

If uptake continues to decline, the scheme’s core purpose may be undermined.

Why Are Applications Falling?

The answer lies in household economics.

Public officers today face significantly higher statutory deductions than in previous years.

Key deductions include:

1. Social Health Insurance Fund (SHIF) — 2.75% of salary
2. Housing levy — 1.5%
3. Increased pension contributions — 1.2% of basic salary (capped at Sh2,160 for higher earners)

When combined with existing:

• PAYE income tax
• NHIF legacy obligations
• SACCO repayments
• Other loan deductions

The strain on payslips is considerable.

Reports indicate many workers now take home less than two-thirds of their basic salary.

The Employment Act, 2007, prohibits employers from deducting more than two-thirds of basic pay and requires employees to receive at least one-third of their salary after deductions.

Even within legal limits, the psychological and practical impact is real: disposable income has narrowed.

Borrowing appetite declines when take-home pay contracts.

The Macro Backdrop: Economic Pressure on Households

Kenya’s broader economic environment provides additional context.

In recent years, the country has experienced:

• Elevated inflation pressures
• Rising interest rates (before recent easing cycles)
• Currency volatility
• Fuel cost fluctuations
• Tax adjustments

While macro indicators may show stabilization, household-level strain persists.

For public officers contemplating a car loan:

• Additional deductions reduce flexibility
• Economic uncertainty discourages new debt
• Rising living costs shift priorities

Vehicle financing, even at subsidized rates, becomes less attractive.

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Treasury Bills as a Parking Strategy

The National Treasury’s decision to invest idle funds into Treasury Bills reflects prudent liquidity management.

Treasury Bills are:

• Short-term government securities
• Low-risk instruments
• Yield-generating assets

By parking the funds in T-bills, the Treasury ensures:

• Capital preservation
• Modest returns
• Liquidity availability

However, this raises a structural question:

Should a welfare-oriented loan scheme function as a liquidity buffer for the state?

If funds are persistently underutilized, policymakers may need to reassess the scheme’s design, eligibility criteria, or attractiveness.

Historical Comparison: Borrowing Behavior Over Time

When the scheme launched in 2015:

• Interest rates in Kenya were higher
• Commercial auto loans were more expensive
• Disposable income ratios were comparatively stronger
• Fewer statutory deductions existed

Today:

• Household leverage awareness is higher
• Government deductions have increased
• Alternative mobility options (ride-hailing, carpooling) exist
• Asset financing culture has evolved
  

Public officers may also be more cautious about long-term debt amid economic uncertainty.

The Psychological Impact of Deductions

Mandatory deductions alter borrowing psychology.

Even if total deductions remain within legal limits, the perception of reduced take-home pay discourages additional commitments.

Workers may prioritize:

• Emergency savings
• School fees
• Housing rent
• Food and transport

Rather than asset acquisition.

This shift reflects a broader behavioral finance dynamic: risk aversion rises when income visibility declines.

Fiscal Implications

From a government perspective, idle loan funds represent:

• Opportunity cost
• Underutilized capital
• Scheme inefficiency

But investing in T-bills has secondary implications:

• It supports domestic borrowing
• It reduces short-term financing pressure
• It internalizes liquidity

In effect, the Treasury is recycling funds within its own debt framework.

While this may optimize capital use, it also blurs the distinction between welfare programs and fiscal liquidity management.

Risks to Monitor

Several risks emerge from sustained low uptake:

1. Scheme Irrelevance

If public officers no longer find the scheme attractive, its policy purpose weakens.

2. Policy Perception

Workers may view the scheme as inaccessible or misaligned with economic realities.

3. Structural Disposable Income Erosion

Continued statutory additions could further dampen borrowing appetite.

4. Asset Demand Shift

Public officers may prefer alternative transport models over car ownership.

Long-Term Outlook: Structural Adjustment or Policy Recalibration?

The future of Kenya’s State and Public Officers Motor Car Loan Scheme will depend less on short-term liquidity management and more on structural income dynamics within the public sector.

At its core, the scheme’s stagnation reflects a shift in financial behavior. Public officers are demonstrating increased caution toward long-term borrowing. That caution may persist unless broader economic conditions improve.

To understand the long-term outlook, we must examine four interconnected dimensions:

1. Income resilience
   
2. Deduction sustainability
   
3. Public sector compensation reform
   
4. Asset financing culture shifts

1. Income Resilience and Wage Dynamics

The most immediate determinant of borrowing appetite is disposable income.

Even if loan terms remain attractive, constrained take-home pay reduces borrowing capacity. The rise in statutory deductions — including SHIF, the housing levy, and pension contribution increases — has compressed net income margins.

If:

• Wage growth fails to outpace inflation
• Additional statutory contributions are introduced
• Tax brackets are not adjusted

Then public officers may continue prioritizing liquidity preservation over asset acquisition.

However, should the government pursue:

• Cost-of-living adjustments (COLA)
• Tax relief measures
• Deduction recalibration
• Structured wage review reforms

Then borrowing confidence could recover.

Historically, consumer credit demand strengthens when real wages rise and inflation moderates. If Kenya’s macroeconomic stabilization efforts succeed — particularly under tighter fiscal coordination — public sector employees may regain borrowing confidence over a 3–5 year horizon.

2. Deduction Sustainability and Legal Limits

The Employment Act, 2007 requires that employees retain at least one-third of their basic pay after deductions. While current deductions may technically comply with this threshold, sustained compression toward that limit creates psychological and financial discomfort.

Over time, policymakers may face pressure to:

• Cap cumulative statutory deductions
• Phase implementation of new levies
• Offer opt-in flexibility for certain schemes

If deduction pressure continues to intensify, borrowing schemes tied to salary deductions — such as car loans — will remain unattractive regardless of interest rates.

The long-term sustainability of payroll-based loan schemes depends on preserving disposable income flexibility.

3. Reimagining the Scheme: Reform Scenarios

If uptake remains low, the Treasury may consider reform options. Several structural adjustments are plausible:

A. Extending Tenor Periods

Longer repayment horizons reduce monthly deduction burdens, making loans more accessible.

B. Interest Rate Adjustment

Further subsidization could increase attractiveness — though this introduces fiscal trade-offs.

C. Electric Vehicle Incentives

Aligning the scheme with Kenya’s green mobility agenda could:

• Reduce fuel cost burdens
• Lower maintenance expenses
• Position the scheme within sustainability goals

D. Tiered Eligibility Models

Income-tiered products could allow differentiated repayment structures.

E. Blended Financing Partnerships

Partnering with commercial banks or SACCOs may spread risk while preserving affordability.

Absent reform, persistent underutilization may prompt Treasury to scale down allocations or repurpose capital toward other public welfare programs.

4. Cultural Shift in Asset Ownership

An overlooked dimension is changing consumer behavior.

Vehicle ownership may no longer hold the same economic priority as it did a decade ago.

Emerging trends include:

• Ride-hailing platforms
• Car-sharing services
• Improved urban transport alternatives
• Remote work reducing commuting frequency

For younger public officers especially, long-term car loans may feel less essential.

If mobility patterns shift structurally, demand for state-backed auto loans may not return to previous expectations.

Fiscal Implications in the Medium to Long Term

From a macro-fiscal perspective, idle funds invested in Treasury Bills are not inherently inefficient. In fact, short-term securities currently offer attractive yields relative to risk.

However, structural misalignment between allocated funds and demand may create:

• Budget reallocation debates
• Scheme viability assessments
• Opportunity cost analysis

If Sh4.3 billion remains consistently underutilized, policymakers may question whether:

• The fund size exceeds demand
• Eligibility constraints are too strict
• Awareness is insufficient
• Economic pressure has permanently altered behavior

Over time, the scheme may either shrink, evolve, or integrate into broader public employee financial assistance frameworks.

Broader Labor Market and Political Economy Considerations

Public officers represent a politically sensitive demographic.

Persistent financial strain within this group may:

• Influence labor negotiations
• Impact public sector morale
• Shape fiscal discourse
  

Low loan uptake is not merely an administrative statistic — it may reflect underlying dissatisfaction or financial stress.

If disposable income compression persists while inflation remains elevated in essential goods (food, rent, education), borrowing restraint may deepen.

Conversely, if macroeconomic reforms successfully stabilize:

• Inflation
• Currency volatility
• Growth momentum

Then consumer confidence — including borrowing appetite — may recover.

Risks to Monitor Going Forward

Several forward-looking indicators will shape the scheme’s trajectory:

1. Wage Adjustments

If public sector wage reviews occur, uptake may increase.

2. Inflation Path

Sustained disinflation could restore purchasing power.

3. Deduction Policy Stability

Additional statutory contributions could suppress demand further.

4. Vehicle Market Conditions

If vehicle prices stabilize or fall, borrowing appetite may rise.

5. Alternative Credit Channels

If SACCOs or banks offer competitive alternatives, demand may migrate away from the state scheme.

Why This Matters Beyond the Scheme

The Sh4.3 billion idle balance functions as a microeconomic barometer.

It reflects:

• Household caution
• Income constraint
• Structural payroll pressure
• Changing financial priorities

When a subsidized loan scheme experiences declining demand, it suggests:

• Risk aversion
• Liquidity preservation preference
• Debt sensitivity

These behavioral signals often precede broader economic shifts.

If public officers — typically considered stable-income earners — are avoiding borrowing, that caution may extend across the wider economy.

Long-Term Structural Implications

Over a five-to-ten-year horizon, three outcomes are plausible:

Scenario 1: Demand Recovers

If income growth resumes and deductions stabilize, the scheme regains traction.

Scenario 2: Structural Downscaling

Persistent low demand prompts the Treasury to reduce capital allocation permanently.

Scenario 3: Program Transformation

The scheme evolves into a broader asset financing or mobility support framework aligned with sustainability objectives.

The most likely path may involve partial reform combined with gradual demand normalization, depending on macroeconomic stabilization.

Conclusion: A Subtle but Significant Signal

The decision to invest Sh4.3 billion in Treasury Bills due to low public officer car loan uptake is more than a liquidity management detail.

It is a reflection of financial caution.

It signals the pressure of cumulative statutory deductions.

It highlights the narrowing of disposable income flexibility.

And it reveals how macroeconomic policy decisions cascade down to individual borrowing behavior.

While the Treasury’s move to park idle funds in short-term government securities is fiscally prudent, the deeper issue lies in income resilience and policy calibration.

If public officers continue to face compressed payslips, borrowing appetite will remain muted — regardless of interest rates.

But if economic reforms stabilize growth, moderate inflation, and rebalance deduction burdens, demand could return.

Ultimately, the Sh4.3 billion balance tells a broader story about Kenya’s evolving household financial landscape.

The coming fiscal cycles will determine whether this episode becomes a temporary adjustment — or a structural turning point in public sector financial behavior.

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photo source: Google

By: Elsie Njenga 

26th February,2026