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

Central Bank of Kenya (CBK) data shows that this decline in credit 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 Impacts Credit Growth

“This decline is mainly due to the reduced borrowing capacity of businesses and households, driven by higher interest rates seen in 2024 and the lower disposable income,” investment analysts from Cytonn said. In the review period, total credit extended to businesses stood at Sh3.9 trillion, with the banking sector still dominating at 81.2 per cent of total lending, while microfinance institutions and SACCOs accounted for 18.8 per cent.

Surge in Non-Performing Loans

However, a surge in non-performing loans (NPLs) to Sh672.6 billion, an 8.3 per cent increase year-on-year forced banks to adopt a more cautious stance, further constraining credit availability.

The contraction contrasts the previous five-year trend, where private sector lending had grown at a compound annual growth rate (CAGR) of 6.5 per cent. Several key sectors bore the brunt of the slowdown:

• Mining and quarrying: -22.7%
• Finance and insurance: -21.2%
• Other activities: -18.1%
• Manufacturing: -9.4%

In contrast, private households saw a 9.2 per cent rise in credit uptake, while agriculture, consumer durables, and trade recorded modest gains of 5.2 per cent, 3.3 per cent, and 2.3 per cent, respectively.

Monetary Policy Tightening Effects

The tightening of monetary policy was a key driver of the credit squeeze. In February 2024, the CBK raised the Central Bank Rate (CBR) by 50 basis points to 13 per cent in a bid to tame inflation and stabilize the shilling.

Even as CBK later reversed course, cutting the CBR by 225 basis points to 10.75 per cent between June 2024 and February 2025, banks remained hesitant to ease lending conditions. Average lending rates stood at 16.4 per cent in February 2025, reflecting caution among financial institutions amid rising loan defaults.

Shilling Appreciation Impact

The appreciation of the shilling in 2024 also played a crucial role in the credit contraction. Many businesses that had taken loans in foreign currencies saw the value of their credit obligations shrink in local currency terms, contributing to a decline in the total outstanding private sector credit.

Implications for Kenya’s Economy

The slowdown in credit expansion has significant implications for Kenya’s economy, where the private sector, dominated by small and medium-sized enterprises (SMEs) drives growth and job creation. SMEs account for 90 per cent of private businesses and employ 88 per cent of the workforce, yet they continue to struggle with access to financing.

According to the Cytonn analysts, as the government aims to reduce its fiscal deficit, fostering a supportive environment for private sector growth, especially for small businesses, will be crucial for increasing revenue collection.

Call for Policy Reforms

“Achieving this requires policy reforms to strengthen the credit market and the introduction of sector-specific funds to drive business growth in key industries like finance, agriculture, manufacturing, and transport,” the Cytonn analysts said.