The ratio of loan defaults to total lending in the banking sector shrunk to a two year low of 15.3 percent in May from 17.5 percent a year ago following write-offs of bad debt and a growth in credit as interest rates declined.
The Central Bank of Kenya (CBK) data indicates that the non-performing loans (NPLs) portfolio stood at Sh694.8 billion in May, down from Sh728.2 billion 12 months ago.
The decline in bad loans ratio follows disclosure of the huge write-offs made by banks last year with listed lenders writing off loans worth Sh75.06 billion last year.
Banks are required to write-off a bad loan if it is classified as non-performing for a year. Credit to the private sector grew by 9.3 percent in May being the fastest pace recorded in the last two years. Growth of the loan book by disbursing credit to households and businesses with strong ability to repay enables banks to improve the quality of their balance sheet.
“The ratio of gross non-performing loans (NPLs) to gross loans stood at 15.3 percent in May 2026, down from 15.6 percent in February 2026, and 17.6 percent in August 2025,” the Monetary Policy Committee, the rate-setting arm of the CBK, said in a statement.
CBK cited households, transport and communications, and mining and quarrying sectors as those that had recorded drops in NPLs.
The industry loan book grew to Sh4.54 trillion up from Sh4.15 trillion a year ago as the price of loans dropped following pressure on banks by CBK to reduce interest rates.
Average lending rates were 14.5 percent in May down from highs of 17.2 in November 2024.
“Growth in commercial banks’ lending to the private sector improved to 9.3 percent in May 2026, compared to 7.1 percent in April 2026 and negative 2.9 percent in January 2025,” said the MPC, adding; "Growth in credit to key sectors of the economy, particularly trade, building and construction, agriculture, and consumer durables remained strong, reflecting improved demand for credit in line with the decline in lending interest rates.”
Banks have also been aggressive to recover loans from borrowers including auctioning of collateral and going to court to recover from corporates that have defaulted on their loan obligations. Conclusion of long running court cases, including resolution of large corporate defaults in favour of banks, has also helped improve the lender’s loan book quality.
Some of the cases recently concluded include Equity Bank Kenya’s enforcement action against Transcentury Limited and its subsidiary East African Cables Limited.
Improvement of the loan book allows banks to carry less loan loss provisions which are marked as expenses on their profit and loss accounts. This means with an improved loan book the lenders are expected to cut back their provisions which will boost their profitability.
Banks have disclosed intentions to pressurise households and businesses to clear defaults in order to further improve the quality of their loan books.
“For the quarter ending June 30, 2026, banks expect to intensify their credit recovery efforts in nine economic sectors," says a CBK report.
The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio,” a survey on banks’ credit officers by the Central Bank of Kenya disclosed.
