Banks' lending dips by 240b as Kenyans shun costly loans

Commercial banks reported a significant drop in lending last year as more Kenyans shied away from costly loans amid an economic downturn that limited their ability to borrow.

This comes despite the Central Bank of Kenya (CBK) reducing the base lending rate from 13 per cent in June last year to the current 10.75 per cent in anticipation that banks will pass on the benefits to their customers.

Data from financial results reported by several banks for the 2024 financial year indicates that net loans and advances to customers dropped by at least Sh249 billion across five banks alone, with several banks increasing their provisions for bad debts.

KCB Group, the country’s largest lender by assets, saw net loans and advances to customers fall by Sh99 billion in the 2024 financial year, a 10 per cent drop compared to 2023.

The firm’s non-performing loans grew by Sh17 billion to stand at Sh225 billion as of December last year, largely driven by KCB Bank Kenya and National Bank of Kenya, which reported Sh10.5 billion and Sh5.6 billion growth in NPLs respectively.

“The main sectors that have been impacted include manufacturing, real estate and building and construction,” explained KCB Group finance director Lawrence Kimathi.

However, personal, consumer and household loans, which account for the largest part of the bank’s loan book, accounted for 14 per cent of non-performing loans, reflecting the economic hardship experienced by Kenyans in recent years.

“About 35 per cent of our loan book sits on personal or consumer-household,” Kimathi said, pointing out the sector’s 9.2 per cent NPL ratio.

“The good news is that it has a single-digit NPL which in itself is quite high. Three or four years back, it used to be something like two or three per cent. This has been largely impacted by a lot of the scheme loans, universities and some of the scheme loans we have with counties have contributed to this growth.”

Equity Group saw a similar drop in lending with net loans and advances to customers in 2024 falling by Sh68 billion compared to the previous year.

The lender’s gross non-performing loans and advances widened by Sh7.4 billion to sit at Sh121.9 billion as at the end of last year.

NCBA Group, I&M Bank and Diamond Trust Bank reported Sh35 billion, Sh24 billion and Sh23 drop respectively in net loans and advances to customers.

The reduced lending comes even as the CBK reduced the base lending rate by 1.75 points between June 2024 and January this year and while some banks effected the changes in their interest rates, the effects are just now beginning to trickle down the economy.

“The Committee observed that the CBR has been lowered substantially since the MPC Meeting of August 2024, yet lending rates have only declined marginally” stated the CBK’s monetary policy committee in their last meeting in February this year. “With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector, and support economic activity.”

The MPC, which meets today for the second time this year, added that banks that do not pass on the benefits of reduced cost of funds to cut interest rates to the private sector will be penalised in accordance with the law.

According to the Institute of Economic Affairs (IEA), the liquidity crunch experienced across the economy is worsened by the government’s borrowing from the domestic market to bridge the budget deficit estimated to hit over Sh800 billion for the current financial year.

“The growth rate in domestic credit extended to the private sector reduced while the pace for the public sector grew by 16.6 per cent,” explains the IEA in a recent report.

“This situation indicates that government borrowing dominated private sector borrowing. The consequences for growth in the medium term show that the vitality of the private sector is adversely affected relative to the year before, and therefore the strong momentum in growth that is anticipated for the whole economy is too optimistic,” reads the report in part.

In its report on the country’s spending plan for the 2025/26 financial year, the Parliamentary Budget Office pointed out that a decrease in annual growth of credit to the private sector from 13.5 per cent in January 2024 to 2.2 per cent in October 2024 could constrain growth across all sectors.

“Higher interest rates make borrowing more expensive for businesses and households, leading to reduced demand for loans,” stated the PBO in its report released in February.

According to the PBO, despite the increase in interest rates at the beginning of last year being attributed to the tightening of the CBK monetary policy, its sustained growth even after the CBR was lowered indicates that other prevalent factors influence lending rates.

“Elevated credit risk is seen to have been a significant contributor since NPLs as a share of gross loans has increased from 15.1 per cent in January 2024 to 16.5 per cent in October 2024,” stated the PBO. “The higher risk perception prompts banks to incorporate risk premiums in their lending rates.”

As the CBK's Monetary Policy Committee meets today, Kenya’s private sector will be watching with anticipation of what relief the regulator can offer for a market that has for the past two years been constrained of growth by the high cost of credit and what action will be taken on lenders that resist passing on the savings of lower cost of funds to their customers.