How local borrowing is stifling Kenya's infrastructure capital needs

The government’s uncontrolled appetite for domestic debt could be its own undoing in the struggle to source funds for infrastructure projects.

An analysis by Africa Finance Corporation (AFC) has documented how growth in domestic debt has put the capital markets of economies on the continent in a chokehold.

For this reason, not much room for growth and maturity is left for the bond market and other instruments to facilitate capital flow into long-term projects.

The appetite for higher risk-free returns by financial services providers, such as banks, pension funds, and insurers, keeps growing even as they allocate more of their capital to government paper.

Little effort then goes into developing creative products for capital mobilisation that would otherwise benefit infrastructure projects.

The State of Africa’s Infrastructure Report 2026 by AFC says the short-term debt instruments issued by governments cannot provide the market with the required ample time for yield curve formation.

While these bills and bonds ensure that the market remains liquid, they do not give room for innovative products to take shape.

The report insists that diversification from government paper is necessary, and lists Kenya among countries with the required foundation to take the next step.

The report says that scaling infrastructure investment is not primarily a function of capital availability, but of the systems that intermediate savings into investable assets.

This requires a combination of credible pipelines, appropriate vehicles, and effective risk-sharing mechanisms.

“Several African markets - including Nigeria, Kenya, Namibia, Botswana, Ghana, and Tanzania – already exhibit many of the foundational conditions required to move in this direction, including sufficiently large asset bases (Sh1.3 trillion to Sh4 trillion), relatively concentrated institutional structures, and an emerging track record in infrastructure delivery,” the report says.

The report says that for the last 15 years, domestic debt on the continent has surged, reaching Sh19.5 trillion ($150 billion) by 2010, a figure that doubled by 2020.

It explains that this growth has been driven primarily by the proliferation of short-term instruments, particularly Treasury bills, which offer governments a flexible financing source while providing institutional investors with liquid, low-risk assets.

Kenya is no exception to this allure of domestic debt.

Reclassification of the country’s economy to a lower-middle-income from low-income has reduced not only access to donations and grants that supported the budget but also made lenders see Kenya as an economically empowered market, capable of paying its debts.

This has forced the government to look inwards as the space for external loans shrinks. In the 2026/27 budget, Kenya will be borrowing in excess of Sh1 trillion from the domestic market and just Sh116 billion from external sources.

On the flip side, the government has established the National Infrastructure Fund (NIF) and the Sovereign Wealth Fund (SWF) to crowd in private capital in a bid to take on capital-intensive projects such as dams, airports and highways.

The NIF is expected to crowd in Sh5 trillion.

These efforts are in addition to the securitisation of some revenue streams from levies that are expected to fund specific projects.

The multilateral finance institution explains in the report that domestic capital mobilisation in Africa is therefore not absent – on the contrary, it is significant – but it remains overwhelmingly intermediated through short-duration government paper.

“While this expansion has supported the development of local debt capital markets and reduced reliance on external financing, it has also constrained these markets’ depth and effectiveness,” it says.

It adds: “The dominance of short-term issuance limits yield curve formation, restricts duration, and reinforces portfolio concentration of institutional portfolios in liquid assets.”

AFC says the gradual expansion of domestic bond markets in countries such as Ghana and Tanzania illustrates the potential for longer-dated instruments to deepen markets, improve price discovery, and broaden the universe of investable assets.

AFC argues that while appetite for domestic debt has surged, real returns from these instruments, despite the double-digit rates, are usually negative when inflation is considered.

As such, governments face high borrowing costs, while domestic investors, despite heavy allocations, struggle to preserve real value.

During the season of high inflation in the country that was inching double-digit, government paper was being auctioned for as high as 18 per cent. Inflation, then, had peaked at 9.6 per cent in October 2022, and opened 2023 at 9.0 per cent.

“Deepening domestic debt markets by extending maturities, diversifying instruments, and strengthening bond market ecosystems will be critical to redirecting capital towards long-term, productive uses,” the report says.

AFC says the reallocation strategy has worked in other economies, listing India as one of them.

It explains that India has leveraged life insurance as a cornerstone of infrastructure financing. This is supported by tailored investment vehicles, such as infrastructure debt funds (IDFs), infrastructure investment trusts (InviTs), and real estate investment trusts (REITs), designed to match insurers’ long-term liabilities.

“As a result, life insurance funds in India allocate over 11 per cent of assets to infrastructure- among the highest globally,” the report says. “This demonstrates how appropriately structured products and intermediation frameworks can effectively channel long-term savings into productive investment.”