Kenya’s private sector saw a surge in non-performing loans (NPLs) as credit shrank by 1.4% in the 12 months to December 2024, a sharp reversal from the 13.9% growth recorded in 2023, according to Central Bank of Kenya (CBK) data.

The decline follows the combined effects of tight monetary policy, elevated lending rates, and the appreciation of the shilling, which reduced the value of foreign currency-denominated loans.

Reduced Borrowing Capacity

Investment analysts from Cytonn noted: “This decline is mainly due to the reduced borrowing capacity of businesses and households, driven by higher interest rates seen in 2024 and lower disposable income.”

Total credit extended to businesses stood at Sh3.9 trillion, with banks dominating 81.2% of lending while microfinance institutions and SACCOs accounted for 18.8%.

Surge in Non-Performing Loans

Non-performing loans surged to Sh672.6 billion, an 8.3% year-on-year increase, forcing banks to adopt a more cautious lending stance. This contraction contrasts with the previous five-year trend where private sector lending had grown at 6.5% annually.

Sector-Specific Impacts

• Mining and quarrying: -22.7% credit uptake
• Finance and insurance: -21.2%
• Manufacturing: -9.4%
• Private households: +9.2%
• Agriculture: +5.2%

Monetary Policy Tightening

The CBK raised the Central Bank Rate to 13% in February 2024 to combat inflation, later cutting it to 10.75% by February 2025. Despite this, average lending rates remained high at 16.4%, reflecting banks’ caution.

The CBK also reduced the Cash Reserve Ratio to 3.25% to increase banking system liquidity, potentially supporting future credit expansion.

Shilling Appreciation Impact

The shilling’s 2024 appreciation reduced the local currency value of foreign-denominated loans, contributing to the credit contraction. While helping stabilize inflation, this inadvertently reduced demand for foreign currency loans.

Implications for SMEs

The slowdown particularly affects Kenya’s SME sector, which comprises 90% of private businesses and employs 88% of the workforce. With 95% of business funding coming from banks (versus 40% in developed economies), limited credit access threatens economic growth.

Cytonn analysts recommend: “Policy reforms to strengthen the credit market and sector-specific funds to drive growth in key industries like finance, agriculture, manufacturing, and transport.”