Kenyan Banks Report Rising Bad Loans Amid Government Payment Delays

A pattern of late state payments to contractors and suppliers has created a credit stress cycle in Kenya's banking sector, raising questions about fiscal management and its downstream effects on...

Kenya's commercial banks continued to accumulate non-performing loans through 2025, with the Kenyan government's delayed payments to suppliers and contractors identified as a primary driver of the deterioration, according to The Africa Report.

Non-performing loans, defined by the International Monetary Fund as credit on which the borrower has not made scheduled payments for 90 days or more, are a key indicator of banking sector health. When they rise sharply, they constrain new lending, increase provisioning costs for banks, and can reduce credit access across an economy.

The Africa Report identified the Kenyan state's pattern of late payments as a structural source of the problem. Businesses awaiting payment from government contracts are less able to service their own bank debt, creating a chain of credit stress that moves from the public sector into the private banking system.

Kenyan banking regulators, including the Central Bank of Kenya, monitor non-performing loan ratios as part of routine prudential oversight. The Central Bank of Kenya reported in its most recent Financial Stability Report that the gross non-performing loans ratio for the sector remained elevated, reflecting ongoing stress in several borrower segments including trade and real estate.

By contrast, The Africa Report noted that Moroccan banks saw a notable improvement in their loan quality over the same period, pointing to a divergence in credit performance across African banking markets. Morocco's banking sector, which includes regionally active lenders such as Attijariwafa Bank and Banque Populaire, has expanded significantly into sub-Saharan Africa over the past decade, creating linkages between North and East African financial markets.

The Kenya National Treasury has acknowledged recurring arrears owed to domestic suppliers and contractors. Civil society groups and the Kenya Private Sector Alliance have previously called on the government to clear pending bills, which the Treasury's own records showed exceeded 500 billion Kenyan shillings in various estimates cited in Kenyan parliamentary proceedings as of 2024 and into 2025.

Several East African banks with Kenyan operations, including KCB Group, Equity Group, and Co-operative Bank of Kenya, have publicly disclosed elevated provisioning for bad debts in their financial statements filed with the Nairobi Securities Exchange. These filings are public records available through the exchange and through individual bank investor relations disclosures.

The problem is not new to Kenya. The Central Bank of Kenya and the IMF both flagged rising non-performing loans in joint Article IV consultation documents dating to 2022 and 2023, noting that government arrears were a known risk to credit quality. What the Africa Report's 2025 data indicates is that the problem persisted rather than resolved.

For ordinary Kenyans, elevated non-performing loans in the banking sector have practical consequences. Banks facing higher bad-debt burdens typically tighten lending standards, increase interest rates on new loans, or reduce credit limits for small and medium-sized enterprises. Kenya's small business sector depends heavily on bank credit for working capital, according to surveys conducted by the Kenya National Bureau of Statistics.

The broader East African context is relevant because several of the affected institutions operate across borders, including in Uganda, Tanzania, Rwanda, and South Sudan, meaning that financial stress in Kenya's banking system can transmit to neighboring economies. The East African Community's financial integration agenda, overseen by the East African Community Secretariat based in Arusha, Tanzania, makes cross-border bank health a regional regulatory concern.

What remains unknown is the precise total value of non-performing loans across the Kenyan banking sector as of the most recent reporting period. The Central Bank of Kenya's next published Financial Stability Report would be the document most likely to provide that figure.