Households and businesses cut loan default at fastest pace in a decade

Loan default has dropped in the last two months on easing living cost and borrowing rates, according to the Central bank of Kenya.

The 1.2 drop in default rate is the highest in the last ten years. In 2016 the drop rate was 0.9 percent.

In a post-Monetary Policy Committee (MPC) meeting  on Wednesday, the regulator said that the banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios.

According to the report, the ratio of gross non-performing loans (NPLs) to gross loans stood at 15.5 percent in January 2026, down from 16.7 percent in October 2025 and 17.6 percent in August 2025.

Decreases in NPLs were noted in the real estate, manufacturing, trade, building and construction, and personal and household sectors. Banks have continued to make adequate provisions for the NPLs.

In January, the cost of living dropped marginally by 10 basis points to 4.4 per cent from 4.5 per cent in December, driven by mixed price movements across selected food and non-food items, according to the Kenya National Bureau of Statistics (KNBS).

Households are said to have also diversified their borrowing profiles, with the majority turning to digital lenders, families and Saccos. 

This is after banks started to restrict lending to individuals, maintaining lengthy application processes and demanding higher collateral in the wake of rising NPLs.

Credit uptake and high repayment were witnessed in the real estate sector, where market data and industry commentary suggest that demand for housing and property that generates income remains steady, particularly in urban centers and satellite towns that are growing rapidly.

Industry players attribute this resilience to sustained population growth, a persistent housing deficit, a gradual shift toward more pragmatic development models and the government’s policy around affordable housing.

The shrinking loan default rate has triggered a rise in commercial banks’ lending to the private sector, to 6.4 per cent in January, up from 5.9 per cent in December 2025 and -2.9 per cent in January 2025.

Growth in credit to key sectors of the economy, particularly building and construction, trade, and consumer durables, remained strong in January 2026, reflecting improved demand for credit in line with the declining lending interest rates.

Average commercial banks’ lending rates stood at 14.8 per cent in January 2026, down from 15 per cent in October 2025 and 17.2 per cent in November 2024.

This is expected to drop further after the regulator cuts the base lending rate by 25 basis points to 8.75 per cent on Tuesday.

This was the 10^th time in a row the banking regulator was slashing the Central Bank Rate (CBR), the rate at which it lends to other banks, hoping that banks pass the benefit to borrowers.

CBK governor Kamau Thugge said the apex bank’s decision will augment the previous policy actions aimed at stimulating lending by banks to the private sector.

“This is expected to support economic activity, while ensuring inflationary expectations remain firmly anchored and the exchange rate remains stable.”

To further strengthen the effectiveness of the monetary policy implementation framework and enhance monetary policy transmission, Thugge said that the MPC has approved a narrowing of the interest rate corridor around the Central Bank Rate (CBR) from the current ±75 basis points to ±50 basis points.

“This will support the alignment of the Kenya Shilling Overnight Interbank Average (KESONIA) to the CBR.”

The lower default rate, rising credit to the private sector, stable shilling and easing inflation have inspired hopefulness amongst captains of industries in the country.

According to CBK, the CEOs Survey and Market Perceptions Survey conducted in January 2026 revealed sustained optimism about business activity and economic growth prospects for the next 12 months.

Even so, some respondents expressed concerns about low consumer demand, high cost of doing business, and increased global uncertainties attributed to heightened geopolitical tensions and higher tariffs.