NAIROBI: ONE indicator of an economic downturn is the ability of debtors to repay loans in accordance with the terms of their loan agreements with financial institutions.
Kenya’s substantial economic vulnerabilities will be further exposed by the current economic challenges it is encountering, particularly during the period of preparation for the 2027 general elections. In recent years, the Kenyan economy has been prosperous and robust.
In recent years, Kenya’s banking sector has experienced elevated levels of Non-Performing Loans (NPLs), which, from an economic perspective, reflect distress in key sectors of the economy.
This is especially evident when focusing on this key economic indicator. An NPL is a loan on which the borrower has failed to make scheduled repayments for 90 days or more.
Consequently, an increase in nonperforming loan (NPL) ratios indicates reduced repayment capacity, liquidity constraints for businesses, and economic duress.
Although Kenya’s financial system is relatively well-capitalised compared with many of its peers, but the persistent rise in NPLs across multiple sectors indicates that the country faces more profound structural economic challenges.
This is briefly illustrated in the following sectors, based on an analysis of data from the Central Bank of Kenya. Audited financial reports from Kenyan banks indicate that NPL ratios have consistently been in the double digits in recent years, with some periods exceeding 14 per cent.
This has constrained credit expansion and put pressure on the banks’ balance sheets, potentially as a result of a struggling economy.
The following analysis of several critical sectors examines their loan exposure, NPL trends, underlying causes, and the extent to which these factors further expose the Kenyan economy as the election fervour for 2027 intensifies.
In my opinion, the estate sector has the greatest share of total loans in terms of loan exposure. The NPL trend is increasing, which indicates a rising trend, as data always speaks the truth.
The real estate sector has been among the hardest hit, as my analysis of the data shows. Banks in Kenya aggressively financed commercial and residential developments during the construction boom of the 2010s, as those who have studied the Kenyan economy would concur.
However, demand for high-end housing was diminished by an oversupply, slowing purchasing power, and rising mortgage costs.
Developers in Nairobi experienced delayed unit sales, resulting in cash-flow disruptions and loan violations, as indicated by assessments of off-takers conducted by real estate agents.
NPL growth resulted from increased debt servicing burdens for both developers and mortgage holders, exacerbated by rising interest rates.
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I believe that this was the result of a combination of factors, including an oversupply, excessive borrowing costs, and a decrease in consumer purchasing power.
The NPL trend has also affected a substantial share of private-sector credit, which is growing at a moderate pace as manufacturing firms in Kenya contend with high energy costs, inflation in imported inputs, and currency depreciation.
Many individuals are unaware that the cost of imported raw materials and machinery has risen due to the depreciation of the Kenyan shilling.
For instance, a food-processing company that imports packaging materials faces higher dollar-denominated input costs, which compress margins and hinder its ability to service loans.
This, in turn, leads to high production costs, lacklustre domestic demand, and exchange-rate volatility. Consumer purchasing power is a critical factor in the wholesale and retail sectors.
Disposable income has declined due to inflationary pressures and new taxation measures in Kenya, resulting in lower sales volumes.
The majority of supermarkets and distributors in Kenya operating on narrow margins experienced a decline in turnover, making it more difficult to repay working capital loans, according to a margin assessment.
The slim margins are primarily due to reduced consumer demand, cost-of-living pressures, and inventory financing risks, although these factors are not explicitly visible.
Although the manufacturing sector is being hit by rising production costs due to imported inflation, agriculture remains vulnerable to droughts, floods, and fluctuations in global commodity prices.
In Kenya, crop yields and farm incomes have declined due to climate variability, and in some cases, irrigation schemes intended for implementation have not been constructed.
Corruption has been reported by high-level Kenyan individuals, some of whom have held topmost positions in the government, has consistently disrupted or stalled irrigation dam projects in Kenya, undermining agricultural productivity, food security, and rural incomes.
The delivery of anticipated benefits from numerous planned dams has been impeded by governance failures, despite the potential of irrigation infrastructure to stabilise crop production in a country susceptible to drought cycles.
The construction sector’s loan exposure is directly correlated with infrastructure and private real estate development, both of which are associated with real estate stress.
Construction firms in Kenya are heavily reliant on government payments and project-based financing.
Contractor liquidity is compromised by delays in government payments for infrastructure, stemming from an unstable, ailing economy that cannot generate sufficient tax revenue to finance public goods and projects.
The accumulation of arrears by contractors awaiting delayed public-sector payments imposes fiscal constraints, delays projects, and creates dependence on public-spending cycles.
This, in turn, affects their loan repayment schedules. Transport companies in Kenya operate in a high-cost environment, with exposure to petroleum price fluctuations and currency depreciation, owing to a struggling economy.
In interviews with major transport companies in Mombasa that operate on regional trade routes, it was observed that they are experiencing higher diesel prices and lower cargo volumes.
These problems are largely the result of inefficiencies at Mombasa Port and other factors that have reduced their repayment capacity.
The evaluation of the KSAA report clearly shows that the daily losses experienced by transportation lines due to delays in cargo handling and berthing are among the most well-documented economic costs.
Depending on the size of the vessel, the Kenya Ship Agents Association (KSAA) estimates that shipping lines incur daily expenses of $20,000 (approximately KES 2.6 million) to $50,000 (approximately KES 6.5 million) per vessel due to berthing delays at Mombasa.
The port is not the sole entity responsible for these expenses; rather, they are passed down the supply chain, resulting in higher prices for importers, transporters, and ultimately consumers.
Full loading is compromised when ships are compelled to vacate berths before completing cargo operations, resulting in higher freight rates and reduced shipping efficiency. The energy and utilities sectors have generally experienced moderate but vulnerable conditions, alongside the transport sector’s struggles.
It is widely recognised that energy initiatives require substantial upfront capital and long repayment periods. The economy’s performance depends on tariff stability and payment reliability, which in turn depend on financial sustainability.
Nevertheless, independent power producers in Kenya have been experiencing delayed payments from public utilities facing liquidity constraints, resulting in payment delays, regulatory risk, and foreign-currency debt exposure as economic conditions continue to tighten.
The NPL trend for SMEs and microenterprises exceeds the corporate average, as indicated by an assessment of banks’ loan reports. Compared with their peers, small and medium-sized enterprises (SMEs) in Kenya often operate in informal markets and lack collateral buffers.
They are disproportionately affected by declining consumer demand and rising supply costs. A small manufacturing enterprise that relies on local market sales experiences a decline in revenues despite preset loan repayment obligations.
The level of household borrowing for mortgages, vehicle loans, and consumer credit is contingent on inflation and employment stability; it rises during periods of economic stress.
It is evident that public-sector employees face significant difficulty meeting monthly loan repayments, as Kenya is ranked the 10th poorest nation in the world by the World Bank. This is due to increased taxes and cost-of-living pressures they are experiencing.
An ailing economy is characterised by real income erosion and rising debt-servicing costs. Reduced credit growth is one of the macroeconomic consequences of high NPLs in the Kenyan financial sector, as banks become risk-averse and tighten lending standards.
As a result, banks raise spreads and lend at higher rates to mitigate risk. Furthermore, reduced investment impedes privatesector capital formation, and lower bank profitability leads to higher loan-loss provisions. Consequently, economic development and investment-driven growth are further slowed.
New credit is constrained by weak growth, which in turn increases defaults.
Despite the fact that Kenya’s economy is at a crossroads, particularly as political rallies prepare for the upcoming general election, the growing number of non-performing loans and their reflection of broad-based stress in real estate, manufacturing, trade, agriculture, construction, transport, tourism, SMEs, energy, and households may not be publicly disclosed.
Although not indicative of systemic collapse, sustained double-digit NPL ratios impede privatesector expansion and economic momentum.
Macroeconomic stabilisation, exchange-rate management, fiscal discipline, climate-resilient agriculture, and targeted credit-restructuring frameworks are all necessary components of a multifaceted strategy to address the issue.
This sectoral strain can also be eased by improving public payment systems, fostering export diversification, and strengthening risk assessment.
Ultimately, non-performing loans (NPLs) are not merely banking statistics; they are indicators of deeper structural economic pressures that require coordinated policy responses to restore sustainable growth.