What happened

The Central Bank of Kenya (CBK) announced that its earnings for the third quarter of the fiscal year increased, reflecting a broader net interest margin (NIM) expansion and a noticeable rise in its loan portfolio. At the same time, the bank reported a modest increase in non‑performing assets (NPAs), signalling that while credit activity is picking up, asset quality is beginning to show early signs of strain. The CBK’s quarterly release did not attach specific percentages to the changes, but the direction of each metric was clearly highlighted in its statement.

Context and background

The CBK, Kenya’s monetary authority, publishes quarterly performance reports that detail its balance‑sheet movements, earnings, and risk indicators. The latest report follows a period of tightening monetary policy that began in early 2024, when the central bank raised the benchmark lending rate to curb inflation that had surged above 6 % in the preceding months. Those policy moves aimed to temper demand, stabilize the shilling, and preserve the bank’s financial health.

Loan growth has been a focal point for the CBK because the institution supplies liquidity to commercial banks through its rediscount window and other facilities. In the third quarter, the bank’s loan book expanded as commercial banks accessed more funding to meet rising demand from small and medium enterprises (SMEs) and the informal sector. The expansion came despite higher policy rates, suggesting that borrowers remain eager for credit, especially for working‑capital needs and expansion projects.

Non‑performing assets, which capture loans that are past due or unlikely to be repaid, have traditionally hovered around the mid‑single digits for the CBK. A modest uptick in NPAs is not unexpected when loan volumes increase quickly, but it raises a flag for regulators to monitor credit risk closely. Historically, the CBK has kept its NPA ratio under control through stringent supervisory standards and periodic stress‑testing of banks.

Compared with what is normal

In recent years, the CBK’s net interest margin has typically ranged between 5 % and 6 % of its interest‑bearing assets. An expansion of the NIM, as reported for Q3, indicates that the spread between the rates the bank earns on its loan portfolio and the rates it pays on its liabilities has widened. This can happen when policy rates rise faster than the cost of funding, or when the bank successfully re‑prices its loan products.

• Loan growth: Historically, the CBK’s loan book has expanded at an average annual rate of around 10 % to 12 %. The Q3 increase aligns with that trend, even as the broader economy faces inflationary pressure.
• Non‑performing assets: The NPA ratio for the CBK usually sits near 5 %. The modest rise noted in the report suggests a movement that is still within a manageable band, but it is higher than the flat or declining NPA trends seen in the previous two quarters.

Why it matters

For Kenyan SMEs, the CBK’s earnings boost and NIM expansion signal that credit may remain accessible, albeit at higher cost. A wider NIM often translates into higher lending rates for businesses, which can compress profit margins for companies that rely on borrowed capital for inventory, equipment, or expansion. At the same time, the growth in the bank’s loan book means that more funds are flowing into the financial system, potentially easing the squeeze on cash‑strapped enterprises.

The modest rise in NPAs serves as an early warning that some borrowers may be struggling to meet repayment obligations. If the trend accelerates, banks could tighten credit standards, making it harder for new borrowers to qualify. SMEs should therefore be vigilant about cash flow management and consider strengthening their financial reporting to demonstrate creditworthiness.

From a macro perspective, the CBK’s stronger earnings reinforce its capacity to maintain monetary stability and support its supervisory role. However, a balance must be struck: excessive NPA growth could erode the bank’s capital buffers, limiting its ability to intervene during economic shocks. Policymakers will be watching these indicators closely as they calibrate future interest‑rate decisions.

Practical steps

• Review your loan terms: Compare the interest rates you are paying with the prevailing market rates and negotiate where possible.
• Strengthen cash‑flow forecasts: Incorporate realistic repayment schedules and stress‑test scenarios to anticipate tighter credit conditions.
• Maintain up‑to‑date financial records: Accurate bookkeeping will help you present a stronger case to lenders and may improve your loan terms.
• Monitor NPA trends: Keep an eye on industry reports about non‑performing loans to gauge the health of the credit market.
• Consider alternative financing: If bank lending becomes more expensive, explore trade credit, supplier financing, or reputable micro‑finance institutions.

Beavoren Ventures’ Financial Management & Analysis service can help your business interpret these macro‑economic signals, optimise your financing strategy, and keep your books ready for any lender’s scrutiny.

Book a consultation with Beavoren Ventures today and let us handle your compliance, books, and advisory in one place.

Disclaimer: This article is informational and does not constitute formal tax, audit or legal advice. For guidance specific to your circumstances, please contact Beavoren Ventures.