Top banks ready Sh298.1b war chest for looming loan defaults

Kenya’s largest banks have fortified their financial defences, setting aside a massive Sh298.1 billion to cover potential loan losses in the first nine months of the year.

The move underscores mounting deep-seated concerns about the economy.

This colossal provisioning, a 20 per cent increase year-on-year for some tier-one lenders, offers a deeper insight into the caution being adopted by banks and a picture of a sector bracing for a coming storm despite the robust profits being reported this earnings season.

Bankers say the strategic accumulation of this financial “war chest” is also a direct response to alarming data from the Central Bank of Kenya (CBK), which shows non-performing loans (NPLs) have surged to Sh731.8 billion as of August this year, up from Sh672.6 billion in December 2024.

This Sh59.2 billion increase in just eight months, bankers said in extensive interviews, underscores the severe financial strain crippling businesses and households, a crisis manifested in a wave of property seizures as auctioneers report a glut of repossessed assets hitting the market.

“This is a classic case of prudent risk management in the face of clear macroeconomic headwinds,” explained a veteran banking analyst who sought anonymity due to client relationships.

“The banks are essentially using their current profitability as a shield.”

They are capitalising on strong returns from regional subsidiaries and government securities to build a buffer that will protect their balance sheets when the domestic credit environment deteriorates further.”

An analysis of financial statements from the nation’s top-tier lenders by The Sunday Standard reveals a unified, defensive strategy.

The decision to significantly bolster credit loss provisions highlights a sector-wide consensus with the risk of domestic defaults being seen as the primary threat, outweighing other positive performance indicators. KCB Group, the country’s largest bank by assets, saw its provisions rise to Sh115.5 billion from Sh109.9 billion a year earlier.

This came even as its gross NPLs climbed to Sh222.0 billion from Sh215.3 billion.

The bank attributed a slight improvement in its NPL ratio from 18.5 per cent to 17.8 per cent to “recovery actions coupled with the sale of NBK,” suggesting aggressive efforts to offload the worst of its bad debt.

Equity Group, the largest bank by customer base, made one of the most dramatic shifts, increasing its provisions by over Sh17 billion to Sh63.34 billion, up from Sh45.99 billion a year earlier.

This aggressive provisioning coincided with a rise in its gross non-performing loans to Sh129.1 billion.

However, CEO James Mwangi was quick to highlight that the group “outperformed the Kenyan industry,” maintaining an NPL ratio of 12.1 per cent against an industry average of 17.1 per cent.

Other major players followed suit. Co-operative Bank of Kenya saw its provisions jump to Sh45.2 billion from Sh37 billion, as its dud loans rose to Sh78.9 billion from Sh70 billion, while Absa Bank Kenya, I&M Group, NCBA, and Diamond Trust Bank (DTB) all added billions to their safety nets. This came as I&M and NCBA managed to reduce their gross NPLs even while increasing provisions, indicating a forward-looking approach to potential risks rather than just reacting to existing ones, according to bankers. Absa Bank Kenya saw its provisions grow to Sh21.7 billion from Sh20.7 billion, while its bad loans increased to Sh44.3 billion from Sh42.6 billion.

I&M Group, on the other hand, reported provisions of Sh18.5 billion, up from Sh17.1 billion, even as its bad loans decreased to Sh33.1 billion from Sh35 billion. NCBA Group increased its provisions to Sh14.7 billion from Sh12.66 billion, managing to reduce its bad loans to Sh38.6 billion from Sh41 billion.

DTB saw one of the largest proportional jumps, with provisions rising to Sh19 billion from Sh14.6 billion. Its bad loans rose to Sh40.88 billion from Sh41 39.1 billion. The Central Bank of Kenya (CBK) Governor Kamau Thugge has consistently cautioned banks to adequately prepare for defaults.

CBK’s careful monitoring of the NPL ratio, which remains a major concern, validates the banks’ preemptive actions, bankers said.

This comes as ordinary Kenyans and businesses confront a liquidity crisis.

The rising defaults are a direct reflection of challenges, including widespread job losses across sectors, soaring living costs, and reduced disposable income due to increased statutory levies, bankers said.

A September 2025 CBK Market Perceptions Survey provides a granular view of the corporate sector’s distress.

Business leaders identified their number one headache as “the elevated cost of doing business, followed closely by reduced consumer demand.”

They say the challenge lies with the average consumer, whose purchasing power remains severely constrained, leading to sluggish sales and slow inventory turnover, particularly in manufacturing and retail.

They said compounding this is a critical liquidity crunch.

A backlog of government pending bill payments owed to contractors and suppliers has also choked the cash flow of countless companies, leaving them unable to access working capital to pay their own employees and loans.

The CBK survey noted that timely payment of these bills would “improve the business environment by improving money circulating in the economy, easing liquidity strain, and reducing non-performing loans.”

While the regulator has sought to stimulate the economy by lowering its benchmark rate, the transmission to the real economy has been weak.

bngugi@standardmedia.co.ke

Bank respondents in the CBK survey reported that demand for credit remains “tempered by reduced disposable incomes.”

The lenders themselves have also turned cautious, with the Risk-Based Pricing Model making it more expensive for riskier borrowers, often SMEs, to access credit, creating a credit crunch for the segment that needs it most.

Despite the prevailing gloom, the business community is pinning its hopes on a seasonal rescue.

The CBK’s September 2025 CEOs’ Survey revealed that 54.8 per cent of business leaders anticipate an increase in demand in the fourth quarter, with 54.4 per cent foreseeing higher sales, largely banking on a Christmas-season boom to salvage the year.

To meet this expected uptick, many firms plan to hire temporary staff and ramp up production.

A key finding is that most firms are operating below capacity, meaning they can respond to a festive demand spike without major new investment by simply increasing shifts or extending working hours.

In their recommendations to the government, business leaders have urgently called for lower taxes, fast-tracked value-added tax refunds, the clearance of pending bills, and closer engagement with the private sector during policy formulation.