Kenya’s massive domestic borrowing may curb bank loans

Kenya’s domestic borrowing plan for FY 2026/27 targets KSh 995.7 billion, a move that could shift how lenders balance corporate loans against sovereign debt, analysts say. The scale of the programme reflects the government’s intention to rely more heavily on internal financing sources rather than external aid.

Fiscal plan and funding gap

The National Treasury’s budget summary projects a fiscal deficit of KSh 1.112 trillion, about 5.3% of GDP. Net external financing is expected to contribute only KSh 116.2 billion, leaving the bulk to domestic sources. This shortfall forces the treasury to tap the local capital market for the remainder of the needed funds.

Because the borrowing will be in local currency, repayment obligations avoid exchange-rate risk. Officials anticipate that Kenyan investors will shoulder most of the financing shortfall, and they expect the move to deepen the bond market’s liquidity.

Impact on lending behavior

“Treasury bills and bonds can offer banks a more predictable return without the same level of company checks required for a business loan,” said David Precious, senior market analyst at EBC Financial Group. He noted that banks may respond by offering smaller loans, demanding more collateral, or shortening repayment periods for firms deemed riskier.

Commercial banks already hold roughly KSh 2.2 trillion in sovereign bonds as of March 2026, accounting for about 27% of banking-sector assets, according to the World Bank’s July 2026 Kenya Economic Update. The concentration of government securities in balance sheets signals that lenders are already comfortable with sovereign exposure.

The World Bank cautions that heavier domestic borrowing could crowd out private-sector credit, potentially dampening investment and overall demand.

Consequences for small firms

The Central Bank of Kenya’s 2024 survey on MSME access to credit found that term loans and overdrafts make up more than 85% of SME financing, while collateral requirements remain the biggest barrier. The data highlight how dependent micro-enterprises are on short-term facilities.

Micro-enterprises typically receive shorter loan tenors because lenders view them as higher-risk borrowers. These firms often lack the asset base that larger companies can pledge.

Broader credit trends

Private-sector credit grew 8.1% in March 2026, with average lending rates falling to 14.7%, according to the Central Bank’s April 2026 monetary policy report. The Central Bank’s December 2025 Monetary Policy Statement projects credit growth of 10.6% by the end of 2026, supported by lower borrowing costs.

Gross non-performing loans stood at 15.6% of total loans in March 2026, down from 17.4% a year earlier, but they remain a vulnerability for lenders.

Banking regulations require core capital to rise from KSh 1 billion to KSh 10 billion by the end of 2029. The FY 2026/27 budget proposes extending the deadline to December 2032 and removing interim milestones.

The extension would give smaller lenders more time to raise capital, retain earnings, or pursue mergers, yet the higher threshold persists, likely influencing loan-allocation choices. According to the firm, banks seeking to strengthen capital positions may favor investments in government securities or larger, well-collateralized borrowers over higher-risk SME lending.

“The clearest signal sits beneath the headline numbers,” David Precious said. “If private-sector credit expands while MSME lending lags, the crowding-out concern may have moved from risk to reality,” he said.