Kenyan banks continue to face an important capital-allocation decision between investing in government securities and extending credit to the private sector. The two alternatives offer different risk and return characteristics. Government securities provide relatively predictable income, liquidity and limited credit risk, while private-sector lending can generate higher yields and support economic activity but exposes banks to greater default, monitoring and recovery risks.
Government securities remain an important component of bank balance sheets. Average Treasury bill rates in August 2026 stood at 8.8% for the 91-day bill, 8.9% for the 182-day bill and 9.0% for the 364-day bill. Beyond the interest income generated, Treasury securities provide liquid assets that can support banks’ liquidity-management requirements. Their relatively short maturities also allow institutions to deploy funds without assuming the longer-duration credit exposure associated with some forms of business lending.
The trade-off becomes clearer when these yields are compared with private-sector lending rates. The average lending rate stood at 14.4% in June 2026, against a deposit rate of 6.84%. This difference creates greater potential interest income from lending, although the headline spread does not represent the bank’s final return after accounting for credit losses, operating expenses and provisions.
The operating environment is also beginning to provide some support for increased private-sector credit. Kenya’s private-sector Purchasing Managers’ Index rose to 51.3 in July 2026 from 50.0 in June, moving above the 50.0 level that separates expansion from contraction. Stronger new orders and modest employment growth pointed towards improving business activity, although elevated input costs, constrained cash flows and logistical difficulties continued to affect firms.
Credit risk nevertheless remains an important consideration. The banking industry’s gross non-performing loan ratio increased marginally to 15.6% in March 2026 from 15.4% in December 2025. However, asset quality among listed banks showed a more favourable trend, with the market-weighted average gross NPL ratio declining to 11.8% in Q1 2026 from 14.0% in Q1 2025, indicating an improvement in credit performance among major institutions.
For banks, private-sector lending therefore represents more than an alternative source of interest income. It is the mechanism through which deposits are converted into financing for business expansion, working capital, investment and employment. A prolonged preference for government securities could limit the extent to which banks participate in this process, even as it provides greater balance-sheet stability.
For investors assessing banking stocks, the composition and quality of assets therefore matter alongside overall balance-sheet growth. Heavy exposure to government securities may reduce credit risk and support liquidity, but excessive concentration can constrain lending income. Conversely, rapid credit expansion can improve earnings while increasing exposure to defaults and provisioning costs.
The investment question is consequently not whether government securities or private-sector lending is inherently superior. It is whether banks can achieve an appropriate risk-adjusted allocation between the two. As private-sector conditions improve and asset quality strengthens, selective credit expansion could create additional earnings opportunities, while government securities can continue providing the liquidity and stability required to manage the risks associated with lending.
