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Banks cut parastatal loans by Sh31bn on Mbadi order
Treasury Cabinet Secretary John Mbadi responds to a question from members of the Bunge la Mwananchi and residents during a dialogue session at Swahilipot Hub on March 7, 2025.
Commercial banks slashed lending to cash-strapped parastatals by Sh30.9 billion in the year ended December 2024, reflecting the impact of high default rates that prompted the Treasury to freeze borrowing approvals and guarantees to public entities with huge debts.
Industry data shows the deep cut pushed the value of outstanding domestic credit to State-owned companies to Sh65.4 billion — levels last recorded in 2015.
Credit flow to the entities, the majority of which are battling large cash flow challenges, was last year also impacted by tough credit standards adopted by banks to rein in elevated defaults which crossed 16 percent of industry total loans.
The data compiled by the Central Bank of Kenya, the financial services regulator, indicate outstanding annual credit to State-owned entities fell by nearly a third (32.09 percent) in December 2024 compared with Sh96.3 billion in the prior year.
The largest cut in a single year in more than a decade came in a period when the Treasury froze approvals for entities that have defaulted on debt repayments, including honouring invoices from suppliers and contractors.
The Public Finance Management Act requires that State-owned enterprises (SOEs) only contract loans from financial institutions, including banks, after getting approval from the Cabinet Secretary for the line ministry with concurrence from the Treasury Cabinet Secretary.
“The National Treasury & Economic Planning will not give concurrence for borrowings or, where applicable, grant guarantees for State Corporations which are in default of loan repayments and pending bills,” Treasury Cabinet Secretary John Mbadi reiterated in a circular to parastatal chiefs last late year.
Some parastatals have for years been struggling to service debt to domestic and international lenders, prompting the Treasury to come in as guarantor to the loans or because of the strategic role they play.
More than half or 31 of the 54 State corporations with loans, for instance, did not make any repayments in the financial year ended June 2024, highlighting the continued struggles these entities are having in keeping up with debt repayments.
They included Kenya Airways, which received a Sh17.4 billion bailout from the Treasury for a loan that was due in the last financial year, underlining the growing burden on taxpayers.
The deepening cash flow challenges for parastatals, most of which are insolvent, have been flagged several times in recent years.
The CBK had in 2022 cautioned banks against lending to State corporations on the grounds that the bulk of the commercial funding goes into recurrent expenditures such as paying salaries as opposed to development projects.
“The SOEs used long-term debt to finance operations expenses rather than investments to generate revenues to service future debt. This limits productivity, capacity, and profitability of SOEs and in turn their viability,” the regulator said.
Loans procured from domestic commercial banks form a small portion of the total debt accrued by the SOEs, which was estimated at nearly Sh1.38 trillion last financial year ended June 2024. The bulk of the debts are owed to international development financiers.
The outstanding amount comprised Sh1.197 trillion on-lent loans, Sh100.2 billion guaranteed debt, and Sh78.21 billion non-guaranteed debt.
The stock of debt held by parastatals is captured as contingent liabilities, meaning that the Treasury will only intervene if the SOEs, which play strategic roles, failed to service the loans.
In addition to loans, State corporations had Sh426.3 billion in arrears to contractors and suppliers of various goods and services as of the end of December 2024.
“State corporations are required to entrench prudent financial management practices in their planning and enhance cost control measures with the aim of delivering services in the most cost-effective manner,” Mr Mbadi said in the budgetary guidelines to the CEOs.
“Chief executives officers/accounting officers of State corporations are reminded that incurring expenditures without approval by line ministry and the National Treasury & Economic Planning is irregular, and they will be held personally liable for such expenditures in accordance with provisions of the Public Finance Management Act, 2012” the CS added.
Banks last year raised borrowing costs to as much as 24 percent as they sought to protect margins and safeguard cash from depositors on the back of elevated benchmark interest rates, which helped the CBK stabilise inflation within its target range of between 2.5 and 7.5 percent.
Annual inflation averaged 4.47 percent in 2024 compared with 7.70 percent in the prior year as prohibitive interest rates prompted firms and households to postpone borrowing. Banks, meanwhile, locked out perceived risky borrowers from credit markets, helping rein in demand-driven price pressures.
That resulted in total credit issued to the private sector falling 1.37 percent year-on-year to nearly Sh3.86 trillion last December, a rare drop last witnessed in 2002, also helped by the strengthening of the shilling against the US dollar.
This is because the stock of loans denominated in US currency dropped when converted into shillings last year compared with 2023.
