Kenya’s Banking Sector Shrinks for First Time in 22 Years as Bad Loans Surge

Kenya’s commercial banks posted their first asset contraction in over two decades in 2024, hit by rising bad loans and slowing credit growth. Industry assets fell 1.6 percent to KSh7.6 trillion, marking the first decline since the early 2000s.

The drop was most pronounced among large banks, whose assets slid 3.5 percent to KSh5.7 trillion, while medium-sized lenders shrank 17.4 percent. Small banks bucked the trend, expanding their assets to KSh576 billion.

Balance sheets shifted toward safer holdings. Loans and advances accounted for 48.1 percent of total assets, down from the previous year, while investments in government securities rose to 27.8 percent. Deposit growth also slowed sharply to 1.23 percent, reaching KSh5.81 trillion.

Non-performing loans (NPLs) remained the sector’s biggest challenge. The gross NPL ratio stood at 16.4 percent in December 2024, among the highest levels in recent years. The loan-to-deposit ratio eased to 70.1 percent, while credit growth weakened despite solid capital buffers, with total capital to risk-weighted assets at 19.7 percent.

The Central Bank of Kenya has cut its policy rate for seven straight meetings to 9.5 percent as of August 12, 2025, to stimulate lending. But according to the Kenya Bankers Association (KBA), the pass-through to commercial lending rates has been muted, leaving banks cautious amid elevated credit risks.

Analysts argue that restoring loan momentum will require broader reforms beyond monetary easing. Key proposals include faster clearance of government pending bills, stronger insolvency frameworks, and a secondary market for distressed assets. These measures, consistent with IMF guidance, are seen as vital for repairing cash flows and reducing NPLs.

In addition, the sector is pushing ahead with payments modernization, including fast-payment systems aimed at lowering transaction costs and boosting deposit mobilization. Transparent provisioning and tighter supervision will also be critical to prevent policy easing from encouraging hidden forbearance.

The reforms, if fully implemented, could help banks rebuild resilience after their first industry-wide contraction in 22 years.