How Kenya's bad loan crisis is forcing families to give up homes, land

The country is grappling with a deepening household debt crisis as a significant surge in Non-Performing Loans (NPLs) – commonly known as "bad loans" – signals widespread financial distress among ordinary families.

This has forced commercial banks to ramp up aggressive recovery efforts that could leave countless households destitute.

"Bad loans" are debts where the borrower has failed to make scheduled payments for a significant period, typically 90 days or more. These loans are considered to be in default and are at high risk of not being repaid in full.

For banks, a high volume of NPLs can erode profitability and capital. For borrowers, an NPL can lead to severe consequences, including damage to credit scores and the loss of assets pledged as collateral.

The latest Credit Officer Survey for the quarter ended June 30, 2025, from the Central Bank of Kenya (CBK), published on Saturday, reveals the grim scale of this crisis.

The report shows that the ratio of gross NPLs to gross loans climbed to 17.6 per cent in June from 17.4 per cent in March, reflecting mounting defaults that threaten both borrowers and lenders.

The Personal and Household sector is identified as the hardest hit by this alarming trend, standing out among all economic sectors. A significant 44 per cent of banks predict a further rise in NPLs within this segment, highlighting the immense pressure on individual Kenyans and their families.

Families are increasingly trapped in a vicious cycle where they borrow to meet basic needs – from school fees and medical emergencies to daily food – while simultaneously struggling to repay existing debts.

"Defaults are growing faster than new loans," the CBK noted in its survey, attributing this worrying trend to prevailing economic pressures that are squeezing household incomes and purchasing power.

This dual pressure implies that while families are desperate for financial assistance, their capacity to service current obligations is eroding.

The rising NPLs in this crucial sector translate directly into immense stress for households, impacting their ability to afford daily necessities, access vital services, and maintain overall financial stability. 

In response to this worsening outlook, banks are not merely observing the trend; they are preparing for decisive action that will inevitably intensify the plight of defaulting borrowers. With 40 per cent of lenders forecasting even higher NPLs in the next quarter, recovery efforts are intensifying across the board.

The survey explicitly states that over 80 per cent of banks plan to escalate collections specifically in the Personal and Household sector. This aggressive push carries devastating consequences for countless families.

For many, it means facing the very real threat of asset seizures and public auctions. Collateral such as homes, plots of land, and vehicles, which often represent years of hard work and savings, could be repossessed and sold off to recover outstanding debts.

Such actions can be financially ruinous, stripping away the foundations of family life and potentially exacerbating poverty across the country.

"Banks are walking a tightrope—balancing risk management with customer survival," said Ian Njoroge, a Nairobi-based financial analyst. This sentiment underscores the dilemma faced by lenders who must protect their financial health while operating in a context of widespread economic vulnerability.

The surge in NPLs also carries a chilling effect on the availability of new credit. When banks see a significant portion of their loans turning sour, they become more risk-averse.

This inevitably leads to a general tightening of credit standards across the board. Such tightening can manifest as more stringent eligibility criteria for new loans, potentially higher interest rates, or a reduction in the overall volume of lending.

While credit standards remained unchanged in the second quarter of 2025, lenders' increased caution, particularly under the International Financial Reporting Standards 9 (IFRS 9) rules – a global accounting standard for financial instruments – may stifle access to crucial loans, especially for vital sectors like small and medium-sized businesses. This reduced flow of credit can stifle job creation and overall economic growth, creating a ripple effect of stagnation across the economy.

Despite improvements in liquidity, driven by higher deposits (57 per cent) and loan recoveries (22 per cent), these gains have not eased lending constraints.

Banks continue to cite lingering risks, including those from the lingering pandemic effects, the operational costs of implementing safety measures like Personal Protective Equipment (PPE), and emerging cyber threats stemming from the shift to digital banking.

Yet, some lenders also perceive opportunities in expanding their digital services to navigate these complex times.

For Kenyan families, the coming months will be a severe test of resilience. The rising tide of bad loans means not just financial anxiety and struggle, but the very real prospect of asset loss, marking a painful chapter in the nation's economic narrative.