Kenya’s lending environment is under intense pressure, and borrowers hoping for lower interest rates may have to wait a while longer. The latest data from the Central Bank of Kenya (CBK) paints a concerning picture.
As of June 2025, non-performing loans (NPLs) have soared to 17.3% of total gross loans, up from 14.8% in the previous quarter—marking the highest level in over a decade. Some banks are reporting Portfolio at Risk (PAR) levels of up to 25%, especially in sectors like trade, real estate, and personal loans.
At the same time, loan uptake has dropped by 5.2% year-on-year. Despite the high demand for credit, fewer Kenyans and businesses are qualifying or willing to borrow under current conditions. The CBK also noted that banks are now holding collateral worth over KES 1.5 trillion, yet disposing of these assets has become nearly impossible due to depressed market demand and reduced consumer purchasing power.
What’s Fueling the Financial Strain?
Several recent statutory deductions have significantly reduced employees’ take-home pay:
- Housing Levy (1.5% of gross salary)
- Social Health Insurance Fund (SHIF) deductions under the new Social Health Act
- NSSF Tier II contributions (up to 6% of gross salary, matched by employers)
These deductions were introduced midstream, catching many borrowers off guard—especially those with active loan obligations. For many, this has pushed their net income below the one-third rule, making them ineligible for further salary deductions and disrupting loan repayments.
This reduction in disposable income has also impacted consumer spending, leading to a slowdown in key sectors such as manufacturing, retail, and services. With less money to cover basic needs, many employees are increasingly financially stressed—leading to lower productivity and a rise in mental health concerns.
Why Aren’t Banks Lowering Interest Rates?
Despite a recent reduction in the Central Bank Rate (CBR) to 12.25% in May 2025 (down from 13.00%), banks have not passed on the benefit to borrowers. The average interest rate on unsecured personal loans still ranges between 16% and 18%.
Why? Because risk perception remains high.
While the CBR provides a policy benchmark, banks consider several other factors when setting interest rates:
- Rising default risk due to increased NPLs
- Administrative costs (staffing, compliance, rent)
- Provisioning for bad debts
- Cost of capital and opportunity cost
- Impact of statutory levies on operations
Lenders are simply pricing in the risk of non-repayment. Until that risk reduces, interest rates will remain elevated.
What Needs to Happen to Ease Lending Costs?
While monetary policy plays a role, a broader and more collaborative strategy is needed to bring down the cost of credit. Here are a few steps that can help:
1. Reassess Statutory Deductions
Adjust or phase in statutory deductions in a way that preserves employees’ disposable income. More liquidity at the household level can reduce default rates and support demand for new loans.
2. Prioritize Completion of Affordable Housing Projects
Using the already collected housing levy funds to complete existing projects would boost confidence and stimulate uptake, especially if aligned with improved access to mortgage credit.
3. Settle Outstanding Payments to Suppliers
Clearing pending bills owed to businesses and contractors—many of whom rely on bank credit—can inject liquidity into the economy and help improve loan performance.
4. Re-evaluate Implementation of SHIF
A more phased or capped approach to health contributions may relieve pressure on already strained household budgets and support a more stable loan repayment environment.
The Bigger Picture
As long as loan defaults remain high and household income continues to shrink, lenders will stay cautious. In the current environment, banks are finding it safer and more profitable to invest in government securities than to issue risky loans to individuals and businesses.
Without changes that boost disposable income, rebuild credit quality, and restore demand, interest rates in Kenya are unlikely to decline in the short term.