Ruto's Sh906b local borrowing plan threatens private credit
Business
By
Brian Ngugi
| Jan 28, 2026
President William Ruto government’s plans to borrow a whole Sh906 billion from the domestic market in a single year, a move analysts and banking sources say risks crowding out the private sector and reversing recent gains in lower loan costs, as the state prioritises its fiscal needs over market stability.
The government’s Medium-Term Debt Management Strategy (MTDS) for 2026/27–2028/29, published this month and reviewed by The Standard mandates that 82 per cent of all new gross borrowing must come from Kenyan financial institutions and pension funds.
The Treasury’s strategy aims to “reduce public debt costs and risks by sourcing a paltry 18 per cent gross borrowing from external sources and a massive 82 per cent from domestic sources over the medium term.”
This domestic borrowing surge is central to a plan spearheaded by Treasury Cabinet Secretary John Mbadi, aiming to refinance and manage a public debt stock that reached a provisional Sh12.25 trillion (63.6 per cent of GDP) as of November 2025.
For the 2026/27 financial year that starts in July, with a projected fiscal deficit of Sh1.1 trillion, this 82 per cent share translates to the Sh906 billion local borrowing requirement in a single year.
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“The new Central Bank of Kenya mechanism ensures rates fall when the policy rate is cut, but the Treasury’s borrowing is a powerful counter-force,” a senior banking executive said, requesting anonymity due to the sensitivity of the matter. “If the government mops up Sh906 billion from the market, yields will be sticky on the downside. That pressure feeds directly into pricing for businesses and households.”
This “shocker” domestic target, implied by the Treasury deficit projections, arrives as a new and more transparent loan pricing system begins to lower costs for borrowers.
Recent CBK data shows the average bank lending rate fell to 14.82 per cent in December 2025 from 15.24 per cent in July, following the introduction of the revised Risk-Based Credit Pricing Model (RBCPM).
The Treasury acknowledges the risks of its plans, warning of “underperformance of Government Securities auctions” if market capacity is strained.
It also flags the threat of “depreciation of the Kenya shilling,” which could be exacerbated by tight domestic liquidity, thereby “raising debt service costs” and fueling inflation.
Market dynamics already show the state’s dominance in the local lending market.
The latest CBK Weekly Bulletin revealed a 15-year Treasury bond was oversubscribed by 132.5 per cent in January, attracting Sh26.5 billion.
Furthermore, domestic debt, primarily held by local financial corporations (79 per cent), has grown to Sh6.78 trillion, underscoring the banking sector’s deep exposure to government paper.
The Treasury’s strategy seeks to lengthen the debt maturity profile, shifting the portfolio to 60 per cent domestic and 40 per cent foreign by 2028/29, up from 53 per cent domestic in mid-2025.
While this reduces the government’s refinancing risk, it commits the local market to funding the state’s long-term liabilities, bankers cautioned.
This creates a policy contradiction they added.
They noted the CBK’s new RBCPM, which uses the Kenya Shilling Overnight Interbank Average (KESONIA) as a reference rate, is designed to make monetary policy cuts quickly benefit borrowers.
However, its effectiveness is predicated on a liquid market not distorted by overwhelming sovereign demand or government borrowing from the local market.
“The signaling from the CBK is now effective because people can expect pass-through,” Equity Group CEO James Mwangi said recently regarding the new system. Yet that very signaling faces a fresh headwind from the Treasury’s parallel borrowing operations, bankers warned.
As the CBK’s Monetary Policy Committee meets early next month, (February 10) its task of boosting private sector credit growth will be complicated by the Treasury’s competing need to absorb nearly a trillion shillings from the same pool of funds, bankers said.