Kenya’s banking sector has recorded a rare easing in loan defaults, supported by strong capital and liquidity positions that continue to shield lenders from elevated credit risk. According to the CBK, the ratio of gross non-performing loans (NPLs) to gross loans declined by 0.5% points to 17.1% standing at KES 720.4bn in September 2025, from 17.6% which stood at KES 731.8bn in both June and August 2025. This marked the first improvement in asset quality after several months of steady deterioration.
The decline in NPLs reflects improved recoveries and repayments rather than a sharp expansion in new credit. While the stock of bad loans remains high by historical standards, the slowdown in deterioration has provided short-term relief to banks that had been grappling with rising impairment charges. This easing supports earnings stability and reduces pressure on capital consumption at a time when borrowing costs remain elevated.
Crucially, the improvement in asset quality is occurring against a backdrop of strong balance sheet buffers. The banking sector’s total capital adequacy ratio stood at 20.1% in August 2025, well above the statutory minimum of 14.5%. This indicates that banks remain sufficiently capitalized to absorb potential losses arising from stressed loans, even if credit conditions were to weaken again.
Liquidity conditions have also remained robust. The sector’s liquidity ratio rose to 59.8% in August 2025, from 58.4% in June 2025, comfortably above the regulatory minimum of 20.0%. Strong liquidity provides banks with flexibility to meet short-term obligations, manage deposit withdrawals, and selectively extend credit without resorting to expensive wholesale funding. Together, solid capital and liquidity positions reinforce financial stability despite elevated credit risk.
However, the easing in NPL ratios should be interpreted cautiously. A 17.1% NPL ratio remains high and signals continued stress among households and businesses. High interest rates, weak disposable incomes, and uneven economic recovery continue to weigh on borrowers’ repayment capacity. As a result, banks are likely to remain risk-averse, prioritising secured and higher-quality borrowers rather than broad-based lending.
Looking ahead, structural reforms may support gradual improvement in credit conditions. The revised Risk-Based Credit Pricing model (RBCPM), expected to be fully operational by 28th February 2026, is intended to improve the transmission of monetary policy and enhance transparency in loan pricing. If implemented effectively, it could support more efficient risk pricing and improve access to credit for lower-risk borrowers.
In sum, Kenya’s banking sector is benefiting from a modest improvement in asset quality while remaining underpinned by strong capital and liquidity buffers. While this provides resilience against near-term shocks, a sustained recovery in loan performance will ultimately depend on broader economic strengthening rather than balance sheet strength alone. (Start your investment journey today with the cytonn MMF, call+2540709101200 or email sales@cytonn.com)
