CBK cuts key rate again as bad loans climb to record Sh700b

The Central Bank of Kenya (CBK) faces a growing policy dilemma as a surge in bad loans across key sectors threatens to undermine its efforts to spur lending and boost economic activity through lower interest rates.

Data and insights from the banking regulator released on Tuesday showed that non-performing loans (NPLs) have climbed to a two-decade high, hitting the Sh700 billion mark and reaching 17.2 per cent of gross loans in February 2025, up from 16.4 per cent in December 2024.

The rise in NPLs, flagged by Central Bank of Kenya (CBK) Governor Kamau Thugge following the Monetary Policy Committee (MPC) meeting, is particularly pronounced in real estate, personal and household lending, trade, building and construction, and manufacturing.

This worrying trend emerged even as CBK moved to lower its ="https://www.standardmedia.co.ke/health/amp/national/article/2001515668/supreme-court-cbk-governor-cant-dictate-interest-rate-hikes">benchmark lending rate<, the Central Bank Rate (CBR), by 75 basis points to 10.00 per cent in March, down from 10.75 per cent.

The Central Bank’s latest rate cut is intended to encourage commercial banks to increase lending to the private sector and support a projected economic growth of 5.4 per cent in 2025, up from an estimated 4.6 per cent in 2024.

However, banking insiders, speaking on condition of anonymity, said yesterday they anticipate maintaining a cautious approach to lending at a time they are grappling with the escalating burden of bad debts.

“The committee concluded that there was scope for a further easing of the monetary policy stance to stimulate lending by banks to the private sector and support economic activity while ensuring exchange rate stability,” said Dr Thugge.

“Therefore, the Committee decided to lower the ="https://www.standardmedia.co.ke/business/amp/financial-standard/article/2001515800/banks-lending-dips-by-240b-as-kenyans-shun-costly-loans">Central Bank Rate< by 75 basis points to 10.00 percent from 10.75 percent.”

The staggering Sh700 billion in bad loans paints a stark picture of the financial distress gripping Kenyans and companies across various sectors. This monumental figure signifies that a substantial portion of borrowers are struggling and increasingly failing to meet their loan repayment obligations, reflecting the harsh economic realities and pressures faced by households and businesses alike. The rising tide of non-performing loans underscores a worrying trend of financial strain and potential hardship, signaling a significant challenge for the overall economic stability and the well-being of many within the nation.

“The usual talk around CBR, where banks are being pushed to cut rates ‘because CBK has cut CBR,’ is mistaken,” one senior banking executive said. “CBR isn’t a price, but a signal. NPLs, however, are an actual cost to a bank, on top of deposit costs and rising regulatory fees.”

Banking sources pointed to several factors exacerbating the bad loan problem. A significant contributor is the estimated Sh800 billion in pending bills owed by national and county governments and public sector corporations, crippling businesses and individuals dependent on these payments.

Furthermore, a challenging economic outlook, with a slowdown in GDP growth in 2024, is prompting banks to adopt more stringent lending standards.

Adding to the complexity, the risk-based lending models advocated by the CBK could, if strictly applied, lead to even higher lending rates to account for the elevated delinquency risk.

“The current pressure by CBK on banks to cut lending rates is effectively asking them to ignore the risk-based lending model,” another executive noted.

The modest 0.2 per cent growth in commercial bank lending to the private sector in March, following a 1.3 per cent contraction in February, suggests that the initial impact of the rate cut is being offset by concerns over credit quality.

While the CBK remains optimistic about a recovery in private sector credit, the high NPL ratio presents a significant headwind, the banking executives said.

Analysts also point to external risks that could further dampen economic prospects.

These include potential global trade disruptions, with some highlighting the possible impact of a 10 per cent tariff plan from the United States, which could negatively affect Kenyan exports.

The MPC has stated it will closely monitor the impact of its policy measures and stands ready to take further action.

With bad loans at a two-decade peak, the CBK faces a delicate balancing act in its attempt to lower borrowing costs and stimulate the Kenyan economy.

The state’s headache over rising NPLs suggests that a swift reduction in lending rates may be difficult to achieve without addressing the underlying issues of delayed government payments and a challenging economic environment, bankers said.