Total bad loans from the banking sector shrank by Sh46 billion in the three months to December 2025, signaling increased liquidity in the market and hopes of business recovery.
Data from the Central Bank of Kenya shows gross non-performing loans declined by 6.4 percent in the three months to December, which is approximately Sh46 billion.
This means bad debts held by banks fell to Sh674.3 billion from Sh720.4 billion in September. Bad debts had been piling up from late 2024, attributable to government pending bills, high interest rates, and a tough business environment.
The debt recoveries saw the quality of the industry loan book improve, with the ratio of defaults to total loans declining to 15.4 percent from 16.9 percent in September.
While a decline in the ratio could result from a decrease in defaults or an increase in total loans, the Central Bank attributed the drop to faster recovery.
“The asset quality, measured by gross non-performing loans to gross loans ratio, improved from 16.9 percent in September 2025 to 15.4 percent in December 2025,” said the Central Bank of Kenya (CBK).
“This was due to a higher decrease in gross non-performing loans of 6.4 percent and an increase in gross loans of 2.6 percent,” added the regulator.
The government had, in December, said it paid Sh123 billion of pending bills, enabling contractors, who were some of the main contributors to the bad debts pile, to pay their obligations.
Bankers who spoke to Business Daily confirmed there had been a contraction of bad debts in their books, attributing the drop to improved business outlook following increased cash flows as interest rates declined.
“Agreeably, there is more money in the economy, so businesses have been submitting repayment plans, and as banks lend, there is a financial cycle that allows the borrowers to pay their suppliers, who are then able to meet their obligations,” said a debt recovery manager in a top-tier bank.
Repayment plans allow banks to reclassify a loan from default to performing.
Banks have also been aggressive in engaging auctioneers to dispose of assets held by the lenders as collateral to recover their money. Insiders, however, disclosed that auctions have been slow owing to a glut of properties in the market, amidst low cash supply.
Credit to the private sector had remained stagnant till late last year when banks responded to rate cuts and threats by the CBK to lower their lending rates.
This has seen increased borrowing, with private sector borrowing growing by 2.6 percent in the three months to December to push the industry loan book to Sh4.36 trillion.
“The increase in gross loans was largely witnessed in the trade, agriculture, and personal and household sectors,” said CBK.
A decrease in defaults contributed to the industry’s pre-tax profits growing by 20 percent at the end of December. Lower non-performing loans allow banks to hold fewer provisions, which are deductible expenses.
Banks posted a pre-tax profit of Sh311.8 billion in the review period, up from Sh260 billion a year earlier on reduced expenses.
Total deposits increased by 5.4 percent from Sh5.95 trillion in September 2025 to Sh6.27 trillion in December 2025.
