A relatively stable interest rate over the past four months has seen non-performing loans drop by Sh41.85 billion to Sh646.35 billion, latest Central Bank of Kenya shows.
This is a 0.9 per centage drop from an estimated Sh688.2billion as Kenyan banks reported an improvement in loan quality as stronger credit growth and easing lending rates support borrowers.
The Central Bank of Kenya (CBK) said the ratio of gross non-performing loans to gross loans declined to 13.9 per cent in September 2026, from 14.8 per cent in June, signalling an improvement in banks’ asset quality.
The latest figure is also significantly below the 17.6 per cent recorded in August 2025, as borrowers in key sectors improve repayment and banks strengthen loan recovery efforts. The decline was recorded in financial services, agriculture, trade, and energy and water sectors.
The improvement comes as banks expand lending to businesses and households following a sustained decline in borrowing costs.
The data show that gross loans increased by 4.3 per cent to Sh4.65 trillion in June 2026, from Sh4.45 trillion in March, an increase of about Sh192.5 billion in three months.
The increase was largely driven by lending to the trade, personal and household, and transport and communication sectors.
This means the banking industry had expanded its gross loan book to about Sh4.65 trillion by the end of June, even as the proportion of loans going bad continued to decline.
The latest monetary policy review shows that lending has continued to strengthen beyond June. Growth in commercial banks’ lending to the private sector reached 10.6 per cent in September, up from 10.3 per cent in August and a contraction of 2.9 per cent in January 2025.
“The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 13.9 per cent in September 2026, down from 14.8 per cent in June 2026, and 17.6 per cent in August 2025,” said CBK Governor Kamau Thugge.
CBK attributed the stronger credit growth to improved demand for loans, particularly in trade, building and construction, agriculture, finance and insurance, and consumer durables.
The improvement in credit quality has also coincided with a significant reduction in borrowing costs over the past two years.
Average commercial bank lending rates stood at 14.4 per cent in September, compared with 14.3 per cent in August and 17.2 per cent in November 2024.
CBK Governor Kamau Thugge and the Monetary Policy Committee maintained the Central Bank Rate at 8.75 per cent at the October 7 meeting, arguing that the current monetary policy stance remains appropriate to keep inflation expectations anchored and support exchange-rate stability.
The decision comes despite a modest rise in inflation. Kenya’s annual inflation increased to 6.8 per cent in September from 6.6 per cent in August, although it remained within the CBK target range. Core inflation rose to four per cent, while non-core inflation eased to 14 per cent.
The central bank expects inflation to remain within the target range in the near term, supported by exchange-rate stability, government interventions and monetary policy.
For lenders, the combination of stronger credit demand and falling NPLs provides some relief after a prolonged period of elevated defaults.
The data suggest that banks are therefore expanding lending without a corresponding deterioration in overall loan quality.
However, the CBK said banks continue to make adequate provisions for bad loans, highlighting the need for lenders to maintain caution as credit expands.
The MPC also revised upwards Kenya’s projected economic growth for 2026 to 5.0 per cent from 4.9 per cent, supported by stronger activity in industry and services.
