Kenya’s Sh995.7bn Domestic Borrowing Plan puts Smaller Firms at risk

EBC Financial Group says reliance on local investors may encourage banks to favour government securities and larger borrowers with stronger collateral

By Eunice Wawuda Last updated Jul 24, 2026

Kenya’s plan to raise KSh 995.7 billion domestically in the 2026/27 fiscal year might influence how banks allocate funds between government debt and business lending, according to highlights from EBC Financial Group (EBC).

The FY2026/27 budget summary from the National Treasury estimates a KSh 1.112 trillion fiscal deficit, equal to 5.3% of gross domestic product (GDP), with net external financing providing only KSh 116.2 billion.

This suggests that local investors may need to fund most of the financing gap. Borrowing in shillings could lower exchange-rate risk since repayments are in local currency and may not automatically escalate if the shilling weakens.

However, increased issuance of Treasury bills and bonds might divert bank funds, that can otherwise go to business loans for inventory, equipment, wages, and expansion. If banks buy a significant portion of these securities, they may cut back on business lending or tighten conditions to mitigate the risk of missed repayments.

David Precious, Senior Market Analyst at EBC Financial Group, said, “Treasury bills and bonds can offer banks a more predictable return without the same level of company checks required for a business loan.

That said, banks may offer smaller loans, request more collateral or shorten repayment periods for firms they consider riskier. Smaller businesses could face stricter terms even while total private-sector credit grows.”

Banks Already Hold KSh 2.2 Trillion in Government Debt

Commercial banks held approximately KSh 2.2 trillion in government securities in March 2026, equal to about 27% of banking-sector assets, according to the World Bank’s July 2026 Kenya Economic Update. More than one quarter of bank assets were therefore already in government debt before the new programme.

This is important because banks must decide how much of their available funds to invest in government securities and how much to lend to companies.

The World Bank’s July 2026 Kenya Economic Update warns that heavier domestic borrowing could crowd out private-sector credit and drag on investment and demand. Government paper pays a set return without the work of checking a firm’s sales, cash flow, repayment history and collateral.

Banks may therefore tilt toward government debt, or lend only to firms with stronger finances and better collateral.

For smaller firms, more selective lending may mean a reduced overdraft, a smaller loan, higher collateral demands or a shorter repayment period.

The Central Bank of Kenya’s (CBK) 2024 Survey Report on Micro, Small, and Medium Enterprise (MSME) Access to Bank Credit found that term loans and overdrafts accounted for more than 85% of MSME lending, while collateral remained a significant barrier to formal credit.

The report also found that micro-enterprise loans carried shorter repayment periods, partly because lenders viewed these businesses as riskier.

A manufacturer may therefore delay buying machinery if the loan on offer is too small or must be repaid too quickly, while a distributor may cut stock orders if its overdraft is reduced. Lower investment and stock purchases could then thin orders for suppliers and slow production and hiring.

Credit is Recovering, but Growth may not Reach Every Borrower

The CBK’s April 2026 Monetary Policy Committee (MPC) statement reported annual private-sector credit growth was 8.1% in March, compared with negative growth in early 2025, while average lending rates had declined to 14.7%. Its December 2025 Monetary Policy Statement projects 10.6% credit growth by December 2026 as lower rates support borrowing.

These figures suggest Kenya is not facing an immediate broad reduction in business lending. However, total growth does not show whether new loans reach smaller firms or remain concentrated among large companies and borrowers with substantial collateral.

Lower average rates may also offer little help to a business that cannot meet security requirements or secure sufficient funding.

Banks may also be cautious when assessing new and less-secured loans as gross non-performing loans accounted for 15.6% of total loans in March, according to the same economic update from World Bank. Although the ratio had declined from 17.4% a year earlier, the World Bank continued to describe the condition of banks’ loan books as a key vulnerability.

A high non-performing loan ratio means a substantial share of lending has missed scheduled repayments, which may encourage banks to apply stricter checks, seek more collateral or favour borrowers with stronger repayment capacity.

Higher Capital Requirements may Reinforce Lending Caution

Banks are also preparing for higher minimum core capital, which is shareholder funding available to absorb losses. The current Banking Act (Cap 488) provides for the requirement to rise from KSh 1 billion in 2024 to KSh 10 billion by the end of 2029.

The FY2026/27 National Treasury Budget Statement proposes extending the deadline to December 2032 and removing annual milestones.

This may give smaller lenders more time to raise funds, retain profits or find merger partners. However, the KSh 10 billion requirement would remain, so banks may still limit loans that could create additional losses while they strengthen capital.

A bank building capital may therefore prefer government securities, larger companies or firms offering substantial property as collateral. Government borrowing and business lending can grow together. What matters is whether that growth reaches smaller firms or stays concentrated among large, well-collateralised borrowers.

The clearest signal sits beneath the headline numbers. If private-sector credit expands while MSME lending lags, the crowding-out concern may have moved from risk to reality.