Kenyan banks are signalling a renewed appetite for private-sector lending, buoyed by stronger deposit mobilisation and improved liquidity levels, even as concerns over rising bad loans continue to shape lending decisions.
A recent survey by the Central Bank of Kenya (CBK) covering 39 lenders shows that total banking sector assets grew by 3.8% to KSh8.73 trillion in the three months to March 2026. Deposits expanded at a similar pace, reaching KSh6.51 trillion, strengthening banks’ funding positions and providing greater room for credit expansion.
Gross loans rose by 1.9% to KSh4.45 trillion, driven largely by increased lending to financial services firms, households, and the energy and water sectors. However, loans accounted for a slightly smaller share of total assets, falling to 51% from 51.9% in the previous quarter, suggesting that banks are accumulating assets faster than they are extending credit.
The survey found that 86% of lenders experienced improved liquidity during the quarter, supported by higher deposits, maturing government securities, and loan recoveries. As a result, more than a quarter of banks identified private-sector lending as their preferred destination for excess funds during the second quarter, ahead of interbank lending, Treasury bonds, and Treasury bills.
Lower interest rates also appear to be reviving borrowing activity. Nearly six out of ten lenders reported that reductions in the Central Bank Rate stimulated credit demand in the first quarter, making monetary policy easing the primary factor behind the renewed appetite for loans.
The trade sector emerged as the strongest driver of demand, with 62% of banks reporting increased borrowing requests compared to 51% in the previous quarter. Household lending also recorded notable growth, with 58% of lenders reporting stronger demand. Banks attributed much of the increased borrowing to rising working-capital needs, indicating that businesses and consumers are seeking financing to manage operational and living costs rather than fund expansion projects.
Competition among lenders is also influencing lending behaviour. While credit standards remained largely unchanged across the economy, more than a third of banks said competitive pressures encouraged them to ease lending requirements. The trade sector recorded the highest level of relaxed lending conditions, reflecting lenders’ confidence in the segment.
Despite the improved lending outlook, asset quality remains a concern. The banking sector’s gross non-performing loan ratio rose to 15.6% in March from 15.4% in December as bad loans increased by 3.4%, outpacing overall loan growth. The trend highlights the challenge lenders face in balancing credit expansion with risk management.
Profitability also came under pressure. Pre-tax earnings slipped slightly to KSh83.5 billion from KSh83.9 billion in the previous quarter as operating expenses rose by KSh5.2 billion while income declined by KSh1.7 billion.
Among all sectors, real estate attracted the greatest caution from lenders. About 30% of banks reported tightening credit standards for property-related borrowing, the highest proportion recorded in the survey. Building and construction, as well as tourism and hospitality, also faced stricter lending conditions.
Also Read: CBK Raises KSh34.38 Billion as June Treasury Bond Sale Falls Short of Target
Even so, banks remain cautiously optimistic about the outlook for bad loans. Half of the surveyed institutions expect non-performing loans to decline during the second quarter, while only a quarter anticipate further deterioration. The trade sector recorded the strongest optimism, followed by financial services. Expectations of worsening loan performance in the real estate sector also eased, with only 14% of lenders forecasting an increase in bad loans, down from 25% in the previous quarter.
Banks are simultaneously intensifying recovery efforts. More than three-quarters of lenders plan to strengthen debt collection measures in the trade sector during the second quarter, making it the most aggressively targeted area. Personal and household loans ranked second, while real estate and construction also remain key focuses for recovery initiatives.
The findings paint a picture of a banking sector that is increasingly liquid and willing to lend, particularly to trade-related businesses, but still wary of sectors such as real estate where credit risks remain elevated.
