What happened

The Central Bank of Kenya (CBK) announced that Kenyan commercial banks collectively held Ksh696 billion in bad loans at the close of 2025. The figure, disclosed in a People Daily report, represents the total amount of loans that are classified as non‑performing under CBK’s regulatory framework. Bad loans are those where borrowers have missed payments for at least 90 days or are otherwise unlikely to repay the principal and interest. CBK’s statement signals that the banking sector is facing a heightened credit risk environment as the economy adjusts to post‑pandemic dynamics.

Context and background

The rise in non‑performing loans (NPLs) follows a period of rapid credit expansion that began in 2020, when banks lowered lending standards to support businesses hit by COVID‑19 restrictions. Over the subsequent years, many borrowers struggled to meet repayment schedules as inflation surged and foreign exchange volatility impacted import‑dependent firms. The CBK, tasked with maintaining financial stability, has periodically issued circulars urging banks to tighten credit appraisal and improve loan monitoring.

In 2023, the CBK introduced a revised risk‑weighting framework that required banks to set aside higher capital buffers for high‑risk exposures. While the policy aimed to curb future defaults, it also exposed the extent of existing problem loans that had been quietly accumulating on balance sheets. The Ksh696 billion figure is therefore not only a snapshot of current losses but also a reflection of the legacy of lenient lending during the pandemic recovery phase.

The banking sector in Kenya is dominated by a handful of large institutions, each holding a significant share of the total loan book. According to the CBK’s quarterly reports, the top five banks account for roughly 70 % of total credit extended. Consequently, the aggregate NPL figure has a material impact on the sector’s profitability, capital adequacy ratios, and ultimately on the cost of borrowing for SMEs and individuals.

People Daily, a leading Kenyan business newspaper, highlighted that the CBK’s announcement came shortly after the regulator’s semi‑annual supervisory review, which flagged “elevated credit risk” in sectors such as real estate, construction, and trade finance. The review also noted that many borrowers were still grappling with the after‑effects of high interest rates imposed by the Central Bank to tame inflation.

Analysts at local brokerage firms have warned that if the NPL trend is not reversed, banks may need to raise provisions, which could erode earnings and potentially lead to higher loan pricing. The CBK has signalled that it will intensify its oversight, including more frequent stress‑testing and targeted inspections of banks with the highest NPL ratios.

Compared with what is normal

Historically, Kenya’s banking sector has maintained NPL ratios in the low single digits, typically ranging between 2 % and 4 % of total loan assets. The Ksh696 billion figure pushes the sector’s aggregate NPL ratio well above these historical norms, indicating a material deterioration in credit quality. While the CBK has not released the exact percentage for 2025, the magnitude of the absolute amount suggests a steep climb from the previous year’s levels, which were reported to be considerably lower.

• In prior years, the total bad‑loan stock usually hovered around Ksh400‑500 billion, making the 2025 figure a clear outlier.
• The surge coincides with a period of tightening monetary policy, where the Central Bank raised the policy rate multiple times, increasing borrowing costs for both corporates and consumers.
• Sector‑wide, banks that had previously enjoyed high profitability margins are now facing pressure to allocate larger loan loss provisions, a move that can dampen dividend payouts and affect shareholder confidence.

Why it matters

For Kenyan SMEs, the rise in bad loans translates into a tighter credit environment. Banks, wary of further defaults, are likely to adopt stricter underwriting standards, demand higher collateral, or raise interest rates on new loans. This can slow down expansion plans, limit working‑capital financing, and increase the cost of doing business for small and medium enterprises that already operate on thin margins.

Consumers may also feel the impact as banks become more cautious in granting personal loans, mortgages, and micro‑finance products. Higher loan pricing can reduce household disposable income, curtail consumption, and potentially slow down the overall economic recovery. Moreover, if banks’ profitability is squeezed, they may delay or reduce investments in digital banking platforms, which could affect service delivery and financial inclusion goals.

Practical steps

• Review existing loan agreements and assess the feasibility of early repayment to reduce exposure to rising interest rates.
• Strengthen cash‑flow forecasting and maintain a buffer of liquid assets to weather potential credit tightening.
• Engage with your bank’s relationship manager to understand any changes in lending criteria that may affect future borrowing.
• Consider alternative financing sources such as trade credit, factoring, or reputable micro‑finance institutions to diversify funding.

Financial Management & Analysis services at Beavoren Ventures can help businesses assess the impact of higher loan provisions on cash flow, optimise capital structures, and develop strategies to navigate a tighter credit market.

Need help with compliance? Email info@beavorenventures.co.ke or call +254 716 296 857.

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.