The Kenyan banking sector is under immense pressure in the face of a sharp rise in non-performing loans (NPLs). This rising burden is a major concern not only for the economy and lenders, but also for borrowers who are struggling to meet their obligations.
According to the same report, the quarterly profit before tax for all banks increased by Sh15.1 billion. That is a comparison between the profit before tax of Sh58.5 billion as at the end of December 2024 and Sh73.5 billion as at the end of March 2025.
Let us simplify this data
Out of every Sh100 loaned out by commercial banks in Kenya, about Sh17.40 is not being repaid—it’s considered bad or uncollectible debt. This is the highest ratio in two decades.
By any yardstick, this is bad news to shareholders, customer depositors, lenders, the government and the entire financial system. Another interesting observation from that report was that gross loans increased by 0.6 percent from Sh4.0 trillion in December 2024, to Sh4.123 trillion in March 2025.
Again, it is evident that there was a jump in gross NPLs of 6.6 percent compared to a rise in gross loans of 0.6 percent. The pain points are clearly identifiable.
Are Higher Bank Profits Masking a Deeper Problem?
The big question is: how did we get here? Why is there a disconnect between profitability and the asset quality ratios for commercial banks in Kenya.
That represented a growth rate of 25.8 percent over the period. Increase in non-performing loans leads to a rise in loan loss provisions. These are the amounts set aside from the profits to take care of a possible losses as bad debts continue to soar. The borrower continues to wail as they watch their collaterals being auctioned while others end up being paupers. It is businessman Henry Shaw who said that debt is like any other trap, easy enough to get into, but hard enough to get out of.
Let’s simplify it. The figures suggest a lending space that is undergoing a very turbulent season. Generally, any ratio that is above five percent is perceived to be in a high-risk quantum and could trigger potential regulatory or strategic intervention.
It is, therefore, expected that the regulator and relevant authorities should have introduced certain radical policy decisions to address the challenge in Kenya.
What’s Causing the NPL Surge in Kenya?
Some of the key causes of non-performing loans in Kenya include weak credit assessment and appraisal systems, high credit costs that could lead to debt fatigue, frail economic conditions and external shocks including the after-effects of Covid-19 among others
However, not all is lost! There is an array of solutions that lenders and the regulator could adopt under the current circumstances to deal with this nagging challenge.
- Firstly, lenders need to build robust credit assessment and management systems, invest in credible debt restructuring skills, adopt dispute resolution mechanisms in resolution of bad or distressed assets.
- Secondly, borrowers need to avoid the lure to always run to courts of law instead of approaching banks for amicable resolutions and invest in professionals who should guide in the management of businesses or projects.
- Thirdly, there is need to adopt radical solutions and enforcement mechanisms apart from the normal supervision and monitoring of financial institutions.
A call for urgent intervention
To effectively address this deepening crisis in our banking sector, the government, through the Central Bank, needs to seriously consider establishment of an asset management company dedicated to resolving the mounting burden of non-performing loans.
Such, by design, is a specialised financial institution tasked with acquiring, managing, and resolving NPLs from commercial banks and other lenders. Its primary objective would be to maximise recovery value of these distressed assets through various strategic approaches—be it restructuring, asset sales, or other viable exit mechanisms.
This model is not without precedent. Several jurisdictions have implemented asset management companies (AMC) with measurable success in stabilising their financial systems. A classic case is that of The Troubled Asset Relief Program (TARP), that was formed by the US after the calamitous 2008/2009 financial crisis.
As part of a US Treasury initiative, the purchase of approximately $700 billion worth of troubled assets from financial institutions was sanctioned. In 2009, Ireland formed the National Asset Management Agency (Nama) for the same reasons.
Other countries that have actualised such initiatives include Finland, Sweden, South Korea, Malaysia, Zimbabwe and Nigeria among others.
The Cost of Inaction
Kenya must now confront a decisive question: is it time to adopt a similar bold and systemic approach as other jurisdictions have opted for? In the face of a growing non-performing loan crisis, the establishment of an asset management company may no longer be optional—it may be essential.
This is a matter that policymakers, regulators, and the public must urgently debate and evaluate. The cost of procrastination could be far greater than the risks of intervention.