After a Sh53.6 Billion Pullback, Kenya’s Banks Reopen the Credit Window

Kenya’s private sector credit growth is back in positive territory after a bruising stretch that saw lending contract by 2.9 percent in early 2025. Commercial banks advanced Sh228.2 billion in new net loans to businesses and households in 2025, reversing a Sh53.6 billion contraction recorded in the year to December 2024. The rebound has coincided with a prolonged easing cycle by the Central Bank of Kenya, which lowered its benchmark rate from 13 percent in August 2024 to 8.75 percent in February 2026.

That headline sounds straightforward. Rates fall, credit rises. Yet the mechanics are more complicated and the recovery less uniform than the topline suggests.

Monthly data show uneven momentum. September 2025 posted Sh79.3 billion in credit expansion, the strongest monthly flow of the year. January, February and August registered contractions. Demand is returning, but not in a smooth line. It looks more like borrowers stepping back into the market cautiously, testing pricing and business conditions before committing.

A Central Bank Push With Real Teeth

The rate cuts did not happen in isolation. The CBK trimmed its policy rate in 10 consecutive meetings, compressing the cost of funds and applying visible pressure on commercial lenders to adjust lending rates. Average commercial bank lending rates, which peaked at 16.64 percent in January 2025, declined to 14.82 percent by December 2025 and January 2026.

Those 182 basis points matter. For a borrower servicing a variable-rate facility, that drop directly lowers monthly repayments. For a firm managing working capital in a tight margin environment, it can mean the difference between rolling over stock and pausing operations.

The Treasury has linked improved monthly credit flows to this easing cycle, along with sustained demand for working capital and the implementation of a credit guarantee scheme. The policy intent is clear: cheaper money should revive lending and, by extension, economic activity.

Still, monetary policy rarely travels in a straight line. Lower benchmark rates do not automatically translate into lower effective borrowing costs if banks remain wary of credit risk.

The Memory of a Credit Freeze

Private sector credit growth did not dip by accident in 2024. Rising interest rates tightened financial conditions. Banks priced in higher risk. Loan impairments climbed. Borrowers, facing expensive credit, delayed expansion or scaled down investment plans.

By the time growth hit negative 2.9 percent, the contraction reflected more than cyclical tightening. It reflected caution on both sides of the desk.

Non-performing loans reached 17.6 percent of gross loans in August 2025, easing to 16.7 percent in October and further to 15.5 percent in January 2026. The improvement is notable but hardly comfortable. An NPL ratio above 15 percent remains elevated by historical standards.

The recent decline has been broad-based, touching real estate, manufacturing, trade, building and construction, and personal and household segments. That breadth suggests repayment capacity has stabilised. It does not erase the risk profile banks are still carrying.

Credit officers have long memories. Even as benchmark rates fall, internal risk committees may not be in a hurry to loosen standards dramatically.

Working Capital, Not Wild Expansion

A January 2026 market perception survey by the CBK pointed to moderate to high credit demand in the first quarter to March. Respondents cited lower lending rates and renewed appetite for working capital after the holiday period.

That detail matters. The demand narrative is not about large-scale capital expenditure or new industrial projects. It is about stocking shelves, financing receivables, covering payroll. Survival credit rather than speculative borrowing.

In building and construction, trade, and consumer durables, the new lending appears tied to keeping operations moving rather than launching bold expansions. This kind of credit supports economic continuity, but it does not necessarily translate into long-term productivity gains.

If rates remain supportive and inflation contained, working capital facilities could gradually morph into longer-term investment loans. But that transition depends on business confidence, not just pricing.

The New Risk-Based Pricing Regime

Alongside the rate cuts, the revised risk-based credit pricing model is set to tighten the link between policy decisions and loan pricing. The framework establishes a benchmark anchored around the Central Bank Rate and the Kenya shilling overnight interbank average, known as Kesonia. Banks then add a premium denoted as K, plus fees and charges, to arrive at the total cost of credit.

The model applies to all variable-rate loans except foreign currency denominated facilities and fixed-rate products.

In theory, this architecture enhances transparency and improves the transmission of monetary policy. When the CBK cuts the CBR, the benchmark should move accordingly, and borrowers should see faster pass-through in their loan pricing.

In practice, the premium K becomes the battlefield. That margin reflects each borrower’s risk profile and the bank’s internal appetite. If banks remain concerned about asset quality, K can widen even as the benchmark falls. Borrowers may notice that policy easing does not always translate into proportionate relief.

The real test of the new framework lies in how aggressively banks recalibrate K as economic conditions evolve.

Banking Profits Under Pressure

Lower lending rates compress net interest margins. While credit volumes are rising, spreads are narrowing. International rating agencies have already warned that Kenyan banks could face weaker profitability in 2026.

The arithmetic is straightforward. If average lending rates fall from 16.64 percent to 14.82 percent, while deposit costs do not decline at the same pace, margins tighten. Add elevated NPLs and higher provisioning, and the earnings outlook becomes more fragile.

Banks may respond by chasing safer borrowers, favouring large corporates over small and medium enterprises. That would keep headline credit growth intact while limiting access for riskier segments of the economy.

Alternatively, they may double down on fee income and non-lending services to offset thinner spreads. The structure of bank balance sheets could evolve even if aggregate credit expands.

Households Re-enter the Market

For households, falling rates alter the calculus. Variable-rate mortgages, personal loans, and asset finance facilities become more manageable as monthly repayments ease. Consumer durables have already absorbed part of the expanded credit flows.

Yet household balance sheets are not infinitely elastic. High living costs, tax burdens, and wage constraints continue to shape borrowing decisions. A lower interest rate does not automatically restore purchasing power.

If employment conditions stabilise and inflation remains contained, consumer credit could strengthen further. If not, households may borrow cautiously, focusing on refinancing rather than fresh commitments.

A Recovery With Edges

Kenya private sector credit growth has improved to 6.4 percent in January 2026 from a contraction of 2.9 percent a year earlier. The turnaround is clear in percentage terms. The deeper question is durability.

The CBK has done its part by easing policy from 13 percent to 8.75 percent over 18 months. The credit pricing model has been retooled. NPL ratios have edged down from 17.6 percent to 15.5 percent. Banks have resumed net lending after a Sh53.6 billion contraction.

But the system is not starting from a clean slate. Asset quality remains strained. Profitability faces pressure. Borrowers are rebuilding confidence after a period of tight conditions.

If economic activity holds and delinquency rates continue to decline, banks may loosen their grip incrementally. Credit growth could move beyond working capital and into fixed investment. If risk concerns resurface, the recovery could plateau even with accommodative policy.

For now, the data tell a measured story. Money is flowing again. The appetite for credit has returned. Whether that appetite translates into sustained expansion depends less on the direction of rates and more on the willingness of banks and borrowers to trust that the worst of the squeeze is over.

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