Kenyan Banks Lower Expected Loans Demand Despite CBK's Interest Rate Cut

• The CBK’s Market Perceptions Survey showed banks had downgraded their private sector credit growth expectations for December 2025
• The CBK noted that the rising non-performing loans (NPLs) continue to pose a risk to the financial sector
• Economist Daniel Kathali told TUKO.co.ke that pending government bills have negatively affected private sector liquidity, contributing to their inability to pay loans

Elijah Ntongai, an editor at TUKO.co.ke, has over four years of financial, business, and technology research and reporting experience, providing insights into Kenyan, African, and global trends.

Kenyan banks remain low on optimism for a rise in loan uptake, even after the Central Bank of Kenya (CBK) cut its key lending rate, the Central Bank Rate (CBR), to 9.75% in June 2025.

Despite declining interest rates and modest signs of economic recovery, the majority of commercial banks foresee only a modest increase in demand for credit in the near term, according to multiple surveys conducted by the CBK in May.

Banks downgrade credit growth expectations

The Market Perceptions Survey revealed that commercial banks downgraded their private sector credit growth expectations for December 2025 compared to earlier projections in January and March.

This was attributed to heightened credit risk, weakened consumer purchasing power, and the government crowding out private borrowers through aggressive domestic borrowing through government securities.

Between April and May 2025, banks reported moderate demand for credit. A slight uptick in loan demand is expected between June and July, particularly from the agriculture, manufacturing, and construction sectors.

However, respondents from the banking sector told the CBK that the high cost of doing business and low disposable incomes due to the rising tax burden on businesses and individuals remain major concerns.

Interest rate cuts failing to ease lending terms

The CBK’s latest monetary policy stance was aimed at stimulating private sector lending.

The CBK reduced its base lending rate to 9.75%; however, many banks still exhibit cautious lending practices, especially toward sectors deemed high-risk like agriculture.

The survey also found that while a higher number of firms reported reductions in loan rates compared to March, the reductions were largely marginal, with most banks trimming rates by only 1.0% to 2.0%.

Consequently, private individuals and businesses continue to report hurdles such as stringent collateral requirements to get a loan, slow loan processing, and banks’ reluctance to restructure existing loans.

"Some respondents reported elevated cost of servicing loans as a result of lower incomes due to the general high cost of doing business; rigidity by banks in reducing lending rates or loan restructuring to meet clients’ financial needs; long bureaucratic processes such as documentation and collateral requirements; and risk aversion by banks as shown by the highly cautious lending practices, particularly in sectors perceived as risky, such as the agriculture sector," CBK reported in the May CEOs survey.

Pending bills hurt private sector and credit access

The banks are also cautious about lending to the private sector due to the rise in non-performing loans or defaults amid tough economic conditions for many businesses.

CBK further highlighted limited growth for many other sectors working with the government due to the pending bills.

Speaking to TUKO.co.ke, Daniel Kathali, an economist, said that lowering lending rates is not going to encourage the banks to ease access to credit if the government does not pay pending bills.

He noted that this will enable the private sector to repay the non-performing loans they have as well as hire more employees and pay their other existing obligations.

"Delayed payments to suppliers, contractors, and service providers have reduced their cash flow, and this is hurting the economy because both the national and county governments are aiding the accumulation of pending bills. Businesses that relied on loans to fulfil government contracts have been unable to repay them due to delayed payments, which has increased the number and amount of NPLs in the banking sector, weakening financial institutions and reducing their ability to lend," Kathali told TUKO.co.ke.

Kathali further noted that struggling businesses often lay off workers, leading to increased unemployment, and in other cases, reducing income for workers, which has led to lower consumer spending and an overall economic slowdown.

Kenya shilling performance ups CEOs' optimism

In other news, Kenyan private sector CEOs expressed cautious optimism about the country’s 12-month economic outlook.

The CEOs' optimistic outlook was pegged on the easing inflation, a stable shilling, lower Central Bank lending rates, and strong agricultural performance due to favourable weather.

According to the CEOs Survey, business leaders also cited digitisation, innovation, and strategic company-level initiatives like automation, diversification, and customer-centric approaches as key drivers of anticipated growth.

However, this optimism is tempered by serious concerns over weak consumer demand, low purchasing power, rising operational costs, and expectations of increased taxes in the 2025/26 fiscal year, as well as the recent surge in public protests against police brutality, which has introduced short-term uncertainty in the business community.

Proofreading by Jackson Otukho, copy editor at TUKO.co.ke.

Source: TUKO.co.ke