Members of Parliament have cautioned that the government’s growing reliance on domestic borrowing could strain Kenya’s financial system by limiting access to credit for businesses and households.
As Joseph Wangui reports, the warning was issued by the National Assembly Committee on Public Debt and Privatisation during its review of the government’s medium-term debt management strategy. Lawmakers expressed concern that increased domestic borrowing, if not carefully managed, could crowd out private sector lending at a time when the economy is seeking stronger growth momentum.
Lower Rates Open Borrowing Window
The concerns come amid a sustained decline in interest rates. The Central Bank of Kenya (CBK) has cut its benchmark rate from 13 percent in August 2024 to 8.75 percent currently. This easing cycle has significantly reduced yields on government securities.
For example, the return on the 364-day Treasury bill has dropped to about 8.9 percent, down from nearly 17 percent in March 2024. Lower yields have reduced the state’s cost of borrowing and created an incentive for the National Treasury to increase domestic debt issuance.
The Treasury plans to source approximately 78 percent of its financing needs from the domestic market in the fiscal years leading up to June 2029. Net domestic financing for the 2026/27 financial year is projected at Sh890.4 billion, slightly above the revised Sh885.9 billion for the year ending June 2026. Overall, the budget deficit is expected to remain above Sh1 trillion for the third consecutive year starting July 2026.
Risk of Crowding Out
MPs have urged the Treasury to ensure that domestic borrowing is “appropriately sized and carefully timed” to avoid excessive pressure on available liquidity. The fear is that strong government demand for funds could reduce the pool of credit available to private enterprises and households.
Kenya’s domestic debt stood at Sh6.83 trillion at the end of 2025, accounting for 55.6 percent of the total public debt stock of Sh12.29 trillion. Commercial banks, pension funds, and insurance companies hold about 79.1 percent of domestic debt, reflecting a high level of concentration within the financial sector. Households and foreign investors account for much smaller shares, at 6.4 percent and 4.7 percent, respectively.
Oversight Institutions Echo Concerns
The Controller of Budget (COB) has raised similar reservations, warning that while issuing additional domestic debt may be manageable in the short term, sustained expansion carries broader macroeconomic risks. These include potential displacement of private investment, slower economic growth, increased systemic financial risk, and higher future interest costs.
The COB has recommended deepening the domestic debt market and diversifying the investor base to reduce refinancing pressure and contain borrowing costs. Although Kenya’s domestic market is relatively advanced compared to regional peers, it remains concentrated and heavily dependent on bank liquidity.
As the government balances its financing needs against economic stability, the debate over domestic borrowing is likely to intensify. Lawmakers and oversight agencies appear aligned on one point: borrowing may be cheaper today, but its long-term impact on private sector growth must be carefully managed.
The warning was issued by the National Assembly Committee on Public Debt and Privatisation during its review of the government’s medium-term debt management strategy. Lawmakers expressed concern that increased domestic borrowing, if not carefully managed, could crowd out private sector lending at a time when the economy is seeking stronger growth momentum.
Lower Rates Open Borrowing Window
The concerns come amid a sustained decline in interest rates. The Central Bank of Kenya (CBK) has cut its benchmark rate from 13 percent in August 2024 to 8.75 percent currently. This easing cycle has significantly reduced yields on government securities.
For example, the return on the 364-day Treasury bill has dropped to about 8.9 percent, down from nearly 17 percent in March 2024. Lower yields have reduced the state’s cost of borrowing and created an incentive for the National Treasury to increase domestic debt issuance.
The Treasury plans to source approximately 78 percent of its financing needs from the domestic market in the fiscal years leading up to June 2029. Net domestic financing for the 2026/27 financial year is projected at Sh890.4 billion, slightly above the revised Sh885.9 billion for the year ending June 2026. Overall, the budget deficit is expected to remain above Sh1 trillion for the third consecutive year starting July 2026.
Risk of Crowding Out
MPs have urged the Treasury to ensure that domestic borrowing is “appropriately sized and carefully timed” to avoid excessive pressure on available liquidity. The fear is that strong government demand for funds could reduce the pool of credit available to private enterprises and households.
Kenya’s domestic debt stood at Sh6.83 trillion at the end of 2025, accounting for 55.6 percent of the total public debt stock of Sh12.29 trillion. Commercial banks, pension funds, and insurance companies hold about 79.1 percent of domestic debt, reflecting a high level of concentration within the financial sector. Households and foreign investors account for much smaller shares, at 6.4 percent and 4.7 percent, respectively.
Oversight Institutions Echo Concerns
The Controller of Budget (COB) has raised similar reservations, warning that while issuing additional domestic debt may be manageable in the short term, sustained expansion carries broader macroeconomic risks. These include potential displacement of private investment, slower economic growth, increased systemic financial risk, and higher future interest costs.
The COB has recommended deepening the domestic debt market and diversifying the investor base to reduce refinancing pressure and contain borrowing costs. Although Kenya’s domestic market is relatively advanced compared to regional peers, it remains concentrated and heavily dependent on bank liquidity.
As the government balances its financing needs against economic stability, the debate over domestic borrowing is likely to intensify. Lawmakers and oversight agencies appear aligned on one point: borrowing may be cheaper today, but its long-term impact on private sector growth must be carefully managed.
