Lower Interest Rates Begin to Ease Credit Stress in Kenya’s Banks

Kenya’s banking sector is showing early signs of stabilisation as falling borrowing costs start to improve loan performance and unlock new lending activity. After eight consecutive months of deterioration, gross non-performing loans declined in September 2025, dropping by Sh11.4 billion to Sh720.4 billion from Sh731.8 billion in August.

The improvement was driven by higher loan recoveries and better repayment behaviour as interest rates eased. As a result, the NPL ratio fell from 17.56 per cent to 16.92 per cent in September, and further to 16.5 per cent by the end of November.

The easing of credit stress is occurring alongside a rebound in lending. Banks expanded gross loans by Sh90.8 billion between August and September, taking total credit to Sh4.257 trillion. This marked the strongest month-on-month growth in more than 30 months. Private sector credit growth also picked up, reaching 6.3 per cent in November 2025, a 19-month high.
Lower lending rates have played a central role in the turnaround.

Average interest rates declined to 15.07 per cent by the end of November 2025, down from 17.22 per cent a year earlier. Cheaper credit has improved borrowers’ ability to service loans, while improved asset quality has reduced pressure on banks to set aside large provisions.
The gains are beginning to feed through to bank earnings. Pre-tax profit from Kenyan banking operations rose by 11.8 per cent to Sh227.9 billion in the nine months to September, reflecting improved loan performance and stronger credit growth.

The key question now is whether the current improvement marks the start of a sustained lending cycle or a temporary pause in stress. For now, the combination of lower rates, improving repayments and renewed credit appetite is creating space for banks to lend more, particularly to households and small and medium-sized enterprises that rely heavily on working capital.