As cost of loans and defaults surged, the banks’ love affair with workers and small traders who for years have been drivers of their profits was disrupted.
Banks for the first time in seven years cut lending to individuals and households fretful about rising defaults as borrowers struggled with loan repayments in a high interest rate environment.
This emerged in a period when thousands of workers breached the legal requirement that demands they take home at least a third of their salary following a deduction of 2.75 percent of gross pay for universal health coverage and housing levy of 1.5 percent of monthly pay.
Central Bank of Kenya (CBK) data shows the value of personal and household loans shrunk by Sh138 billion to a three-year low of Sh943.84 billion in 2024 from Sh1.082 trillion in the prior year.
The number of loan accounts under households also dropped by 1.42 million to 10.72 million, building up on a 1.55 million shrinkage in 2023.
The personal and household credit, which makes up 92.6 percent of all loan accounts, was the only category of borrowers to post a decline in both value and number as the rest of other economic sectors, including agriculture, manufacturing, real estate and trade, posted growths.
Kenya Bankers Association (KBA)—the industry lobby—reckons that a spike in non-performing loans (NPLs) prompted banks to cut back on unsecured loans, which largely fall under the personal and household category.
“In 2023 and 2024, interest rates were generally high and NPLs increased considerably. To mitigate a further rise in NPLs, banks would allocate more to secured lending. A majority of personal loans are unsecured. This partly explains the trend,” Raimond Molenje, the KBA chief executive officer, told the Business Daily.
The aggressive interest-rate hikes that started in 2023 pushed lending rates to their highest levels in eight years, triggering defaults that forced banks to snub workers seeking personal loans.
Default rates in personal and household loans hit Sh100.97 billion or 10.7 percent of the loan book from Sh92.03 billion or 8.5 percent a year earlier.
The elevated default in personal loans was lower compared with industry’s bad loans rate, which hit 17.1 percent of the sector loan book of Sh697.3 billion at the end of December.
However, banks kept lending to other sectors on the strength of quality collateral such as land.
The CBK had raised the Central Bank Rate (CBR) to a 22-year high of 13 percent in February last year, where it stayed up to August of the same year.
The rise in CBR had sent the average cost of credit to an eight-year high of 17.2 percent by November last year, with some banks charging as high as 25 percent.
The defaults prompted lenders to seek shelter in loans backed by collateral such as land and motor vehicles as opposed to unsecured ones in an environment of job cuts.
A decline in personal loans coincided with reduced demand for goods and services in corporate Kenya, triggering stagnant pay and freeze in hiring plans.
Workers rely on loans to buy clothes, furniture and electronics as well as run small businesses that rely on personal loans for working capital.
“Demand is the bulwark of the economy, and when household credit contracts, it weakens the very engine that drives growth,” said Ken Gichinga, chief economist at Mentoria Economist.
“Higher interest rates hurt demand for personal credit and this spills over to small businesses as a cash crunch since many of these small businesses depend on personal loans. In addition, the taxes and other statutory deductions that have been introduced or enhanced over the past two years have left households with little room to accommodate debt.”
The CBK on August 12 lowered its benchmark lending rate by 25 basis points, in a move aimed at stimulating credit to the private sector.
The key rate was reduced to 9.50 percent from 9.75 percent, marking the seventh consecutive cut that has seen the banking regulator put pressure on banks to lower cost of loans.
Mr Molenje says the trend of reduced lending to individuals and households looks set to reverse this year, partly on the declining cost of credit and the newly approved loan pricing framework that is expected to enhance credit scoring.
The personal and household segment saw the banking sector post an overall reduction of 1.34 million loan accounts in the year the overall loan book dropped by Sh100.2 billion to Sh4.099 trillion.
This means the increased demand for credit in other sectors could not fully make up for the slump in the personal and household credit, which equals 23 percent of the loan book.
The decline in loan accounts and loan values indicates that fewer borrowers accessed fresh credit than those whose loans matured or were repaid during the year. In addition, the new loans disbursed were generally smaller in size and meant for consumption, resulting in an overall contraction of the personal lending market.
Banks are still cautious about stepping up personal and household lending this year, according to the CBK’s June 2025 credit survey. This is despite the CBK having started easing the cost of credit. The average lending rate for bank loans dropped to a 17-month low of 15.24 percent at the end of July, with the CBK having slashed the CBR.
This year, the CBK has reduced CBR four times –February, April, June and August– by a cumulative 1.75 percentage points to 9.5 percent. This year’s cuts follow three in 2024, which delivered a similar reduction, but many banks delayed lowering lending rates until the CBK intervened this year.
The CBK credit survey reveals that most lenders expect a surge in NPLs from the personal and household segment in the quarter ending September. At the same time, 84 percent of banks indicated they would intensify recovery efforts, including through asset seizures and stricter repayment enforcement, to contain rising defaults.
“Respondents indicated that the level of NPLs is expected to remain constant in 10 economic sectors but increase in the personal and household sector during the next quarter,” said the CBK in the survey report.
The contraction in loan accounts for the second year running many also signal stress in household balance sheets, with rising costs of living compounding the burden of expensive loans.
Borrowers who had tapped loans on the strength of their payslips were beset by increased State deductions towards social healthcare and retirement savings in an environment where workers have suffered inflation-adjusted pay cuts for five straight years.
For banks, the fall in household lending often means a shift toward safer assets such as government securities, even though this reduces their profitability from higher-margin retail loans.
