The stock of loan defaults in the country’s banking sector has eased for the first time in eight months on the back of increased recoveries and repayments, offering a breather to banks and emboldening them to increase lending to households and businesses.
Latest data from the Central Bank of Kenya (CBK) shows that gross non-performing loans (NPLs) —the stock of loans for which no interest or principal has been paid for at least three months— declined to Sh720.4 billion in September 2025, down from Sh731.8 billion in August.
The Sh11.4 billion decline in NPLs bucked the trend of a steady build-up in bad loans that began in January last year, when NPLs stood at Sh683.4 billion and rose over the months through August.
The improvement comes amid increased recoveries by lenders and a gradual easing in the cost of loans —factors that have helped borrowers stabilise repayments after months of pressure from tight financial conditions.
Moderating interest rates have eased pressure on borrowers in sectors such as trade, manufacturing and real estate, which had previously recorded higher default rates. CBK data shows the average lending rates fell to 15.07 percent at the end of November 2025 compared with an eight-year high of 17.22 percent in a similar period in 2024.
The reduced loan defaults saw the NPL ratio improve to 16.92 percent in September from 17.56 percent in the previous month, further supported by a faster rise in lending. Between August and September, banks expanded the loan book by Sh90.8 billion to Sh4.257 trillion, marking the largest month-on-month rise in gross loans in over 30 months.
The NPL ratio improved further to 16.5 percent by the end of November, signalling continued decline in the stock of defaulted loans and emboldening banks to step up the pace of lending.
Lenders saw their combined nine months pre-tax profit from the Kenyan operations hit Sh227.9 billion at the end September, marking 11.8 percent rise from Sh203.8 billion in a similar period in 2024.
The increased profit came amid higher interest income and reduced operating expenses as many banks cut their provisioning for loan defaults.
Banks are starting the New Year 2026 having started stepping up lending to the private sector amid continued decline in the cost of credit. A decline in NPLs looks set to encourage more lending.
Commercial banks’ lending to the private sector accelerated to 6.3 percent in November 2025, marking the fastest pace in 19 months as improving credit conditions and lower borrowing costs spurred demand.
The last time the pace of growth exceeded this level was in April 2024 at 6.6 percent. The acceleration in the pace has come on the back of CBK cutting the benchmark lending rate in nine consecutive sessions including last month where it slashed the rate to nine percent from 9.25 percent.
At nine percent, the Central Bank Rate—a key signal in the pricing of loans— is at the lowest level in about three years, having stood at 8.75 percent in January 2023.
The latest pace of credit growth marks a contrast from a negative growth of 2.9 percent in January last year.
The banking industry is transitioning from the risk-based loan pricing model to the Kenya Shilling Overnight Interbank Average (Kesonia) —a benchmark rate that reflects the average interest rate at which banks lend and borrow unsecured overnight funds in local currency.
CBK expects the revised model, will improve the transmission of monetary policy decisions to banks’ lending interest rates and enhance transparency in the pricing of loans.
