Banks ditch hustlers for Treasury bonds amid worsening debt crisis

Banks have continued to allocate a growing share of their balance sheets to non-credit assets, particularly government securities. [File, Standard]

Commercial banks are turning their backs on small businesses and households, pouring record amounts of cash into government securities instead, as President William Ruto's borrowing binge sucks up available credit and crowds out the private sector, a new industry report shows.

The banking sector's total assets expanded by 10.3 per cent to Sh8.35 trillion in 2025, but the bulk of that growth came not from lending to entrepreneurs and families, the "hustlers" Ruto has championed, but from buying government debt.

Investments in government securities jumped 18.8 per cent to about Sh2.5 trillion during the year, raising their share of total banking assets from 27.8 per cent in 2024 to 29.9 per cent in 2025.

"Banks have continued to allocate a growing share of their balance sheets to non-credit assets, particularly government securities, reinforcing the longer-term decline in credit intensity," the Kenya Bankers Association's State of the Banking Industry Report 2026 states.

Meanwhile, the share of loans and advances, money that powers businesses, creates jobs and puts food on tables, declined from 48.1 per cent to 46.5 per cent, even as net loans grew by 6.9 per cent in absolute terms to Sh4.35 trillion.

The contrast shows banks increased their holdings of government debt nearly three times faster than they grew their loan books.

The shift comes as the Ruto administration's borrowing appetite has swollen the public debt stock from Sh8.7 trillion when he took over from Uhuru Kenyatta in September 2022 to more than Sh13 trillion today, according to official data.

The Central Bank of Kenya (CBK's) December 2022 weekly bulletin showed public debt stood provisionally at Sh8.7 trillion when Kenyatta departed office, with domestic debt accounting for Sh4.37 trillion and external debt at Sh4.33 trillion. Since taking office, Ruto has added more than Sh4.3 trillion in new borrowing, a 49 per cent increase in less than four years.

The shift is not a matter of choice, analysts say. It is a consequence of the government's insatiable appetite for domestic borrowing, which has left banks with a simple calculation: either lend to the state at attractive, risk-free yields, or lend to small businesses burdened by high default rates and thin collateral.

Customer deposits, the lifeblood of bank lending, grew by 9.9 per cent to Sh6.38 trillion in 2025. But the industry's Loan-to-Deposit Ratio, a key measure of how much of those savings are being recycled into productive credit, declined from 70.1 per cent in 2024 to 68.1 per cent in 2025. Put simply, banks are taking in more deposits but lending out a smaller share.

"Deposit mobilisation continued to outpace lending growth," the report notes. "While banks successfully mobilised domestic savings, a growing share of these resources helped boost liquidity more than private sector lending."

For Kenya's micro, small and medium enterprises, which account for most businesses, generate significant employment and contribute substantially to national output, the consequences are severe.

Even as the banking industry disbursed Sh326.5 billion to MSMEs in 2025, nearly three times its annual commitment, the distribution of credit remains highly concentrated.

Productive sectors such as agriculture (1.59 per cent), building and construction (1.23 per cent) and manufacturing (0.82 per cent) account for tiny slices of outstanding credit.

The report acknowledges the challenge. "Expanding sustainable access to finance for MSMEs remains one of the most important opportunities for accelerating inclusive growth." But the data suggests banks are moving in the opposite direction.

The crowding out comes as Kenya's public debt has crossed the Sh13 trillion mark. Since taking office in October 2022, Ruto has added billions in new borrowing amid pressure to shift from deficit-and-borrowing-anchored budget-making.

The Treasury now expects to borrow Sh1.04 trillion from local markets in 2026/27, roughly Sh3.5 billion every single day. Commercial banks already held approximately Sh2.2 trillion in government securities in March 2026, equal to about 27 per cent of banking-sector assets, according to the World Bank's July 2026 Kenya Economic Update.

"The government's significant appetite for local debt is cited as the primary reason for banks prioritising government securities over lending to the private sector," analysts have noted.

The World Bank and fiscal watchdogs have warned directly that heavier domestic borrowing risks crowding out private-sector credit and dragging on investment and economic demand.

For banks, the arithmetic is, however, compelling. Income from government securities increased by 9.6 per cent to Sh287.2 billion in 2025, even as interest income from loans and advances declined by 7.5 per cent to Sh500.4 billion. The proportion of government securities interest to total income rose from 24.9 per cent in 2024 to 27.9 per cent in 2025.

As a result, profit before tax surged 17.6 per cent to Sh306 billion. Banks are therefore making more money than ever, just not by lending to hustlers.

"Banks continued to rebalance their income streams in 2025, with stronger returns from government securities offsetting weaker loan interest and foreign exchange earnings amid subdued private sector credit demand," the report states.

For ordinary Kenyans, the shift translates into a daily squeeze. When the government needs to borrow Sh1.04 trillion from local banks, it crowds out lending to businesses and households.

That means higher loan rates for small businesses, higher mortgage rates for families, and less credit available for farmers and traders.

The Controller of Budget has warned that interest payments on domestic debt alone are projected to hit Sh1.03 trillion this financial year, more than 40 per cent of every shilling the government spends.