A relatively stable interest rate over the past four months has seen non-performing loans drop by Sh41.85 billion to Sh646.35 billion, latest Central Bank of Kenya shows.
This
is a 0.9 per centage drop from an estimated Sh688.2billion as Kenyan banks reported
an improvement in loan quality as stronger credit growth and easing lending
rates support borrowers.
The
Central Bank of Kenya (CBK) said the ratio of gross non-performing loans to
gross loans declined to 13.9 per cent in
September 2026, from 14.8 per
cent in June, signalling an improvement in banks’ asset quality.
The
latest figure is also significantly below the 17.6 per cent recorded in August
2025, as borrowers in key sectors improve repayment and banks strengthen loan
recovery efforts. The decline was recorded in financial services, agriculture,
trade, and energy and water sectors.
The
improvement comes as banks expand lending to businesses and households
following a sustained decline in borrowing costs.
The data show that gross loans increased by 4.3 per cent to Sh4.65 trillion in June 2026, from Sh4.45 trillion in March, an increase of about Sh192.5 billion in three months.
The
increase was largely driven by lending to the trade, personal and household,
and transport and communication sectors.
This
means the banking industry had expanded its gross loan book to about Sh4.65 trillion by the end of June,
even as the proportion of loans going bad continued to decline.
The
latest monetary policy review shows that lending has continued to strengthen
beyond June. Growth in commercial banks’ lending to the private sector reached 10.6 per cent in September, up from
10.3 per cent in August and a contraction of 2.9 per cent in January 2025.
“The banking sector remains
stable and resilient, with strong liquidity and capital adequacy ratios. The
ratio of gross non-performing loans (NPLs) to gross loans stood at 13.9 per
cent in September 2026, down from 14.8 per cent in June 2026, and 17.6 per cent
in August 2025,” said CBK Governor Kamau Thugge.
CBK
attributed the stronger credit growth to improved demand for loans,
particularly in trade, building and construction, agriculture, finance and
insurance, and consumer durables.
The
improvement in credit quality has also coincided with a significant reduction
in borrowing costs over the past two years.
Average
commercial bank lending rates stood at 14.4
per cent in September, compared with 14.3 per cent in August and 17.2 per
cent in November 2024.
CBK
Governor Kamau Thugge and the Monetary Policy Committee maintained the Central
Bank Rate at 8.75 per cent at
the October 7 meeting, arguing that the current monetary policy stance remains
appropriate to keep inflation expectations anchored and support exchange-rate
stability.
The
decision comes despite a modest rise in inflation. Kenya’s annual inflation
increased to 6.8 per cent in September
from 6.6 per cent in August, although it remained within the CBK target
range. Core inflation rose to four per cent, while non-core inflation eased to
14 per cent.
The
central bank expects inflation to remain within the target range in the near
term, supported by exchange-rate stability, government interventions and
monetary policy.
For
lenders, the combination of stronger credit demand and falling NPLs provides
some relief after a prolonged period of elevated defaults.
The
data suggest that banks are therefore expanding lending without a corresponding
deterioration in overall loan quality.
However,
the CBK said banks continue to make adequate provisions for bad loans,
highlighting the need for lenders to maintain caution as credit expands.
The
MPC also revised upwards Kenya’s projected economic growth for 2026 to 5.0 per cent from 4.9 per cent,
supported by stronger activity in industry and services.