Kenya banks face high bad loans despite rate cuts and economic recovery

Kenya’s banking sector is still under pressure from a surge in bad loans, highlighting deeper economic stress even as interest rates fall and growth begins to stabilise.

• Kenya’s banks are still dealing with high bad loans despite falling interest rates.
• Loan defaults rose after rate hikes and delayed government payments hit businesses.
• Banks are now lending more cautiously, limiting credit to the private sector.
• Recovery is underway but remains slow, with risks still elevated.

Figures from the Central Bank of Kenya show that non-performing loans stood at about 15.6% in March 2026. While this is lower than the peak seen in 2025, it remains far above the levels the industry maintained for most of the past decade, signalling that the system has not fully recovered.

The numbers matter beyond the banks. When more loans go bad, lenders become cautious, credit becomes harder to access, and businesses slow down hiring and investment. That effect is now visible across parts of Kenya’s economy.

For years, Kenya built a reputation as one of Africa’s more resilient banking markets, supported by strong regulation, mobile money innovation and steady credit growth.

That trend began to reverse after 2022, when a combination of tighter monetary policy and fiscal strain hit borrowers.

The first shock came from rising interest rates. The Central Bank of Kenya sharply increased its benchmark rate in 2024 to contain inflation and stabilise the currency.

Borrowing costs rose quickly, pushing up loan repayments for households and businesses.

Although inflation has since eased and the central bank has cut rates to below 9% in 2026, the earlier tightening continues to affect loan performance.

Many borrowers who struggled during that period have not fully recovered, leaving banks with a backlog of distressed loans.

A second, less visible factor has been government finances. Delays in payments to contractors and suppliers created cash flow problems across key sectors such as construction, manufacturing and trade.

Businesses that depend on public contracts were unable to meet obligations, and many defaulted on bank loans, feeding directly into the rise in bad debt.

This combination of high borrowing costs and fiscal pressure has weakened loan books across the industry.

Large banks have reported rising defaults even where lending growth slowed, indicating that existing loans deteriorated faster than new ones were created.

To absorb the impact, banks have increased provisions for potential losses. While this strengthens balance sheets, it also reduces profits and limits how much new credit can be extended.

As a result, many lenders have shifted funds into government securities, which offer safer returns.

This shift has wider economic consequences. Small and medium-sized businesses, which drive employment in Kenya, are finding it harder to access credit, slowing expansion at a time when the economy needs momentum.

There are signs of gradual improvement. Private sector credit has returned to growth after contracting in 2025, supported by lower interest rates and easing inflation.

Kenya’s inflation rate has dropped to around 4-5% in early 2026, while the shilling has shown relative stability after earlier volatility.

However, Kenya’s banking sector still compares unfavourably with peers. In Nigeria, non-performing loans remain within regulatory limits of around 5%, while markets such as Morocco report levels below 10%.

Kenya’s ratio remains significantly higher, underscoring the scale of the challenge.

For investors and analysts watching frontier markets, this raises concerns about credit risk and lending conditions in East Africa. A prolonged period of high bad loans could weigh on bank profitability and slow the broader economic recovery.

Smaller lenders are under even greater strain. Unlike larger banks, they have limited capital buffers and face stricter regulatory requirements to raise capital over the coming years.

Managing rising loan defaults while trying to attract new investment presents a difficult balancing act.

Even so, the sector is not in crisis. Kenyan banks remain well-capitalised overall, and regulators say the system is stable. But stability does not mean a clean recovery.

Key risks remain unresolved, including outstanding government payments and weakness in sectors tied to public spending. Until these pressures ease, bad loans are likely to remain elevated.

For now, Kenya’s banks are navigating a slow and uneven recovery, caught between improving macroeconomic conditions and the lingering effects of a credit cycle that turned sharply against them.