Banks tighten lending to stem resurgence in bad loans

A banking hall at one of the local banks. [File, Standard]

The prevailing economic conditions have made banks more risk-averse when extending credit to customers, as indicated by contrasting figures in the latest report published by the regulator.

The report by the Central Bank of Kenya (CBK) suggests that banks are tilting towards better asset quality, lower-ticket lending, and higher-quality borrowers to reduce the risk of non-performing loans.

This strategy is bearing fruit as the ratio of non-performing loans (NPLs) against total lending banks extended in 2025 reduced slightly by a percentage point, equivalent to Sh362.7 million.

Of the 11 sectors documented in a report by the Central Bank of Kenya (CBK), four reported an increase in their share of bad loans compared to 2024.

These are agriculture, trade, tourism, and personal and household.

The Bank Supervision Annual Report 2025, published in September, shows that the size of NPLs as a percentage of gross loans stood at 16.0 per cent. This compares with 17.1 per cent in 2024, a difference of 1.1 per cent between the two periods.

This is even as banks increased their lending to the market in 2025 by 6.8 per cent.

According to the report, the size of NPLs in 2025 stood at Sh696.9 billion, compared with Sh697.3 billion in 2024.

Gross loans in 2025 amounted to Sh4.3 trillion, compared with Sh4.1 trillion in 2024.

Meanwhile, in December 2025, a majority of NPLs were in the trade, real estate, manufacturing, and personal and household sectors.

“CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions for the loans in the four economic sectors to mitigate the risk of default,” the report says.

The report shows that the share of bad loans in the agriculture sector relative to all NPLs rose from 4.5 per cent in 2024 to 5.5 per cent in 2025. In trade, the share rose from 21.6 per cent to 24.5 per cent, while in tourism, which is combined with restaurants and hotels, it rose from 2.8 per cent to 3.3 per cent.

For the personal and household category, the share of NPLs relative to total bad loans increased from 14.5 per cent to 16.4 per cent.

Of all 11 sectors, the most NPLs are concentrated in trade, closing the year at Sh170.6 billion. However, the sector with the most gross loans is personal and household, at Sh1.2 trillion.

According to the report, the number of loan accounts grew from 11.6 million to 15.8 million.

This is an increase of 36.1 per cent. However, gross loans extended to customers improved by just 6.8 per cent, from Sh4.1 trillion in 2024 to Sh4.3 trillion in 2025.

This is as NPLs went down 1.1 per cent.

The CBK report explains that asset quality, measured by the ratio of gross NPLs to gross loans, improved, with the ratio decreasing to 16.0 per cent in December 2025 from 17.1 per cent in December 2024.

“This was mainly due to a decrease in gross non-performing loans (1.1 per cent) as compared to the increase in gross loans (6.8 per cent). The improvement in asset quality was mainly due to new advances and repayments,” the report says.

These figures show how strict banks have become when extending credit to customers.

This strictness is also revealed in the further classification of the loans.

Banks classify loan performance into five categories: normal, watch, substandard, doubtful, and loss.

A normal loan performs according to its contractual terms. A watch-rated loan is 30 to 90 days overdue, while a substandard facility has payments delayed by 90 to 180 days.

A doubtful loan is 180 to 360 days overdue, while a loss is one that has surpassed one year.

In the report, the size of both normal and loss loans increased. The ratio of normal loans to total lending improved from 72.4 per cent in 2024 to 74.7 per cent in 2025.

The loss ratio also rose from 4.6 to 5.3 per cent.

In figures, normal loans increased from Sh2.9 trillion to Sh3.2 trillion, while those considered loss rose from Sh189.2 million to Sh232.2 million.

“The increase in the non-performing loans in the loss category was mainly occasioned by challenges in the business environment,” the report says.

For the other categories, ratios declined in line with the amounts.

Loans under watch fell from 10.4 per cent of gross credit in 2024 to 9.1 per cent in 2025. Substandard decreased from 3.0 per cent to 2.6 per cent, while doubtful dropped from 9.4 per cent to 8.3 per cent.