Rising Local Borrowing by Government Raises Pressure on Businesses and Interest Rates

Kenya’s growing reliance on local borrowing is putting pressure on interest rates and reducing access to credit for businesses, according to new analysis by the Institute of Public Finance (IPF). The report shows that domestic debt now forms the largest share of Kenya’s public debt, as the government increasingly turns to local markets to fund its budget.

As of June 2025, total public debt stood at about Sh11.8 trillion, with 54 percent coming from domestic borrowing. This figure has continued to rise, reaching about Sh7.08 trillion by March 2026.

This shift means the government is borrowing more from local sources such as banks, pension funds, and insurance firms. As a result, more money is being directed into government securities, leaving less available for private sector lending.

The trend has also pushed up the cost of borrowing. Domestic debt is now carrying an average interest rate of about 12 percent, while Treasury bill and bond rates have risen in recent years, with short-term rates reaching as high as 16 percent. The IPF warns that this situation is crowding out private sector credit, especially for small and medium-sized businesses that rely on bank loans to grow.

At the same time, the cost of servicing debt is taking up a larger share of government spending. In the 2024/25 financial year, debt servicing reached about Sh1.72 trillion, exceeding spending on key sectors such as health and social protection.

While borrowing locally helps reduce risks linked to foreign exchange, the report notes that it comes with higher interest costs and increased pressure to refinance debt.

The growing debt burden is also raising concerns about transparency and oversight, with questions on how sustainable the current borrowing path is and its impact on future economic growth. While domestic borrowing may offer short-term stability, it could limit long-term growth if businesses continue to face reduced access to credit.