Banks cut lending to private sector in favour of bills, bonds

Banks cut lending to the private sector in the first three months of the year, curtailing the government’s push to improve access to affordable credit in a bid to stimulate economic recovery.

An analysis of Q1 financial results shows that banks opted to splash billions on the government, with the top six banks in the country increasing investment into state securities by an average of 13 per cent,  declining yields notwithstanding.

This is despite Central Bank of Kenya (CBK) lowering the benchmark Central Bank Rate to 10 per cent in April, down from 10.75 per cent in February, the fifth consecutive cut from the decade high rate of 13 per cent.

Stanbic Bank Kenya, which once again maintained its tradition as the first bank to release earnings, cut loans by Sh11 billion in the first three months of the year to Sh244 billion compared to Sh255 billion same period in 2024.

This affected the bank’s net earnings, which dropped by 17 percent to Sh3.3 billion. Reduced lending activity and lower foreign exchange income impacted the lender, though the lender retained robust capital and liquidity buffers.

Offsetting these declines, interest income from government securities rose significantly, increasing by 127.9 per cent to Sh3 billion from Sh1.3 billion. Analysts at Faida Investment Bank say the growth reflects a deliberate strategy to increase exposure to government instruments, leveraging higher yields and a more stable risk profile.

Standard Chartered Bank Kenya, on the other hand, slashed lending to individuals and businesses by a massive 10.2 percent from Sh153.6 billion in Q1 2024 to Sh137.8 billion, highlighting a cautious approach to credit deployment and funding strategy. However, loan loss provisions declined to Sh0.41 billion, down from Sh0.79 billion last year, reflecting stable asset quality.

Limited lending saw the lender post a 13.5 per cent decline in net profit to Sh4.86 billion in Q1 2025, marking its first earnings contraction in recent years.

Even so, the lender’s investment in state securities also shrank by 13.5 per cent to Sh89.3 billion compared to Sh103.07 billion in a similar period last year.

On Monday, Absa Bank announced that it cut lending by six per cent in Q1, 2025, to Sh308 billion, highlighting cautious lending amid lingering economic uncertainty.

This is likely to have been influenced by the rising rate in loan defaults, which surged 12 per cent to Sh36 billion compared to Sh32 billion same period in 2024.

The bank reported Sh6.2 billion in net profit for the first quarter of 2025, marking a four-year-on-year increase, even as total revenue slipped four percent to Sh15.8 billion.

KCB Group and Co-op Bank Group defied the trend, disbursing more loans during the period under review.

KCB which delivered a flat net profit of Sh16.5 billion, increased lending to the private sector by nine per cent, with the loan book hitting just over a trillion shillings compared to Sh935.6 billion in a similar period in 2024.

The non-performing loan (NPL) ratio hit 19.3 per cent, up from 18.2 per cent, pointing to sustained credit risk challenges. The lender, however, increased lending to the government by a massive 23 per cent.

Coop Bank, on the other hand, disbursed Sh385 billion in loans, a  1.75 per cent rise compared to the corresponding quarter in 2024.

Lending to the government, however, rose by 14 per cent despite shrinking yields, which have been dropping since mid-last year. Last week, yields on 91, 182 and 364 T-bills dropped by an average of 0.2 points to 8.3, 8.5 and 10.003 per cent, respectively, down from a high of 16 per cent early last year. 

The average yield on bonds has since dropped to 13.65 from a high of 19 per cent. 

Lending to the private sector has been on a declining mode for almost two years now. Despite the recent drop in average commercial bank lending rates — from 17.2 percent in November 2024 to 15.8 per cent in March 2025 — private sector credit growth has remained anemic. In February, it even contracted by 1.3 percent, before recording a marginal growth of 0.2 percent in March.

According to CBK, commercial bank lending to the private sector contracted by 1.4 per cent in December 2024 compared to the previous year, mainly reflecting exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the shilling.