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Bank loan defaults rise by Sh21bn despite lower credit cost
Bankers said as more money flowed into the economy, more businesses were submitting repayment plans for their overdue obligations, allowing banks to reclassify these loans from default to performing.
Total bad loans from the banking sector rose by Sh21 billion in the first quarter of the year as defaults rose among households and businesses in the agriculture, trade, and manufacturing sectors.
The increase in bad loans or non-performing loans (NPLs), which partly reversed the decline of Sh46 billion seen in the fourth quarter of 2025, came despite falling interest rates, which have lowered the cost of servicing loans for borrowers.
The Central Bank of Kenya (CBK) says the default rate on gross loans rose to 15.6 percent at the end of March from 15.4 percent in December, raising the volume of non-performing loans from Sh674.4 billion to Sh695.4 billion in the period.
The higher volume of bad loans is a factor of the lingering economic challenges facing businesses and households, and the faster growth in lending to the private sector by banks.
Gross loans to the private sector grew by 8.1 percent to Sh4.46 trillion in the 12 months to March 2026, compared to 7.4 percent in February, and a contraction of 2.9 percent in January 2025, as per data provided by the CBK.
The March growth represented the fastest pace of new lending by the banks in two years, attributed by the CBK to improved demand for credit by the building and construction, trade, agriculture, and consumer durables sectors.
“Increases in NPLs were noted in the personal and household, trade, agriculture, and manufacturing sectors,” said CBK Governor Kamau Thugge in a briefing after this week’s monetary policy committee meeting.
“Banks have continued to make adequate provisions for the NPLs, and the sector remains profitable, providing adequate buffers.”
In contrast to the first quarter of this year, banks had made strides in lowering their exposure to bad loans in the last quarter of 2025, after aggressively pushing recoveries through auctions even as they expressed concerns about difficulties in selling the seized collateral, such as houses and motor vehicles.
Businesses also experienced improved liquidity after the government settled more than Sh123 billion worth of pending bills in the period. This enabled contractors to honour their obligations with banks, having been among the biggest drivers of the growth in NPLs over the previous two years.
Bankers said as more money flowed into the economy, more businesses were submitting repayment plans for their overdue obligations, allowing banks to reclassify these loans from default to performing.
The decrease in defaults contributed to the industry’s annual pre-tax profits for 2025 growing by 20 percent to Sh311.8 billion, up from Sh260 billion in 2024. Lower non-performing loans allow banks to hold fewer provisions, which are deductible expenses on their profit statements.
Looking ahead at the rest of this year, executives polled by the CBK in its periodic market perceptions and CEO surveys expressed optimism that the momentum in business activity and economic growth prospects will be maintained, signalling a moderation in NPLs.
The CBK attributed the optimism to a stable macroeconomic environment with low inflation and a stable exchange rate, lower interest rates, and expected favourable weather conditions, which are expected to support agriculture.
Respondents also told the apex bank that increased infrastructure spending, increased digital innovations, and improved private sector credit growth will support business activity.
The surveys are usually carried out ahead of the MPC meetings to give the CBK a wider view of the economy as it sets the key policy rate.
