Lending by commercial banks to parastatals has dropped to its lowest level in nearly a decade and a half, even as credit to the national government surges, highlighting a shift in how banks are allocating funds within the public sector.
Data by the Central Bank of Kenya (CBK) shows net domestic credit to parastatals fell to Sh35.8 billion in December 2025, a steep 45.3 percent decline from Sh65.4 billion a year earlier.
The drop marks the sharpest contraction in recent history, extending a two-year slide that has wiped out nearly two-thirds of lending since 2023.
The steep fall in credit to parastatals points to more than shifting bank appetite for largely cash-strapped but asset-rich parastatals. It coincides with a firm directive issued by the Treasury that has tightened the tap on new borrowing by State-owned firms.
Treasury Cabinet Secretary John Mbadi warned chief executives of State corporations against taking up fresh loans without explicit government approval.
“State corporations are reminded that they should not procure any loan, overdraft facility, and/or any form of credit facility with a financial institution without prior approval of the Cabinet Secretary, line ministry with the concurrence of the Cabinet Secretary, the National Treasury and Economic Planning,” said Mr Mbadi in a circular dated December 16, 2024.
“The National Treasury and Economic Planning will not give concurrence for borrowings or, where applicable, grant guarantees for State corporations which are in default of loan repayments and pending bills,” he added, effectively locking out financially distressed firms from accessing bank credit.
The directive appears to have had an impact on the flow of bank credit to parastatals in the first year.
In contrast, net credit to the government from commercial banks and non-bank financial institutions rose at a robust pace, growing 15.35 percent to Sh2.29 trillion in December 2025 from Sh1.98 trillion a year earlier. The rebound follows an 11.4 percent decline in 2024, when lending had fallen from Sh2.24 trillion in December 2023, the CBK data shows, signalling a renewed surge in sovereign borrowing.
The divergence highlights a growing preference by banks for government exposure as lending to State corporations dries up, pointing to a fundamental reordering of credit flows within the economy.
The tightening stance mirrors earlier concerns raised by the Central Bank of Kenya over how State-owned enterprises (SOEs) have been using borrowed funds. The financial services sector regulator in 2022 cautioned banks that much of the commercial lending to parastatals was being channelled into recurrent spending rather than productive investment.
“The SOEs used long-term debt to finance operational expenses rather than investments to generate revenues to service future debt. This limits productivity, capacity, and profitability of SOEs and, in turn, their viability,” the CBK said at the time.
The CBK numbers indicate that after briefly rebounding in 2023 with a 27 percent increase to Sh96.3 billion, parastatal borrowing reversed course, shrinking by 32.1 percent in 2024 before plunging further in 2025.
Loans from domestic commercial banks account for only a small share of total parastatal debt, which exceeds Sh1 trillion, with the bulk owed to international development financiers.
Official data shows outstanding on-lent debt to State corporations stood at about Sh1.05 trillion as of June 2025, alongside Sh83.24 billion in guaranteed debt and Sh44.87 billion in non-guaranteed obligations, highlighting the scale and complexity of liabilities sitting across State corporations.
Much of this debt is classified as contingent liabilities, meaning the government is only required to step in if the entities, many of which play strategic roles in infrastructure and service delivery, fail to meet their obligations.
Mr Mbadi’s conditioning of access to credit on repayment performance is aimed at helping parastatals clean up their balance sheets rather than rely on fresh borrowing.
The resurgence in government borrowing, on the other hand, suggests banks are increasingly channelling funds toward the sovereign, which is perceived as lower risk and offers more predictable returns. This dynamic raises concerns about the crowding-out effect, where private and semi-public entities struggle to access credit as government demand intensifies.
Lending to parastatals has steadily declined from a peak of Sh108.4 billion in 2017, interrupted only by a short-lived recovery in 2023. The latest figures place credit well below even pandemic-era levels, highlighting the scale of the current pullback of credit.
