The World Bank has raised fresh concerns that Kenya’s domestic borrowing habits are now severely limiting credit access for private businesses across the country.
In its latest Kenya Economic Update released this week, the global lender notes that commercial banks prefer buying high-yielding government securities over extending loans to companies, creating what economists call a crowding-out effect on private sector growth.
Local banks currently hold more than KSh 4.2 trillion in Treasury bills and bonds, a figure that has grown by nearly 25 per cent in the past two years.
With risk-free government paper offering returns above 16 per cent for short-term bills, lenders find it far more attractive than financing small and medium enterprises that often struggle to provide collateral or show consistent cash flow.
The report highlights that private sector credit growth dropped to just 4.8 percent last year, one of the lowest rates in a decade.
Manufacturing enterprises, transportation companies, and even big stores say they have to wait months for loan approvals or are quoted interest rates above 20% when they eventually get the money.
The World Bank’s assessment is backed up by statistics from the Central Bank of Kenya, which show that lending to the government now makes up roughly 40% of banks’ total assets.
This shift began accelerating after the government lost affordable access to international commercial borrowing following the 2024 Eurobond repayment crisis. Industry leaders say the situation has reached critical levels in counties outside Nairobi.
“Factories in Nakuru and Eldoret cannot expand because banks would rather park money in a 91-day Treasury bill than finance a new production line,” said Jaswinder Bedi, chairman of the Kenya Private Sector Alliance.
He added that several members have postponed investments worth billions of shillings this year alone. The Treasury has defended its domestic borrowing strategy, arguing that it remains the most reliable way to fund budget deficits without returning to expensive foreign commercial loans.
Officials said that Kenya was able to roll over the $2 billion Eurobond in February 2024 using just local resources, which kept the country from defaulting.
The World Bank, on the other hand, says that immediate policy adjustments are needed. These include decreasing interest rates on government assets and giving banks reasons to lend to productive industries.
The study also says that the loan guarantee mechanism that supported thousands of companies during the Covid-19 pandemic should be brought again. Economists say that if private sector lending keeps being crowded out, Kenya’s GDP growth for 2025 might be less than the 5.4 per cent that is expected.
Small businesses, which employ over 80 per cent of workers outside agriculture, remain particularly vulnerable as they rarely qualify for the few loans still available.
Commercial bank chief executives privately admit the trend is unsustainable but say they must protect shareholder returns in the current high-interest environment.
“When Treasury bills pay 16 per cent with zero risk, no board will approve lending to a startup at 18 per cent,” explained one CEO who requested anonymity.
The National Treasury has promised to review its domestic borrowing calendar for the second half of the financial year. Officials say they are exploring ways to reduce reliance on short-term paper while maintaining market stability.
As Kenya approaches the mid-term budget review next month, pressure is mounting on lawmakers to address the growing disconnect between government financing needs and private sector credit starvation.
Business leaders hope the World Bank’s warning will finally force meaningful changes before more companies are forced to scale down or close entirely.
