Commercial banks have raised the cash holdings on their books to record levels amid slow growth in lending to the private sector, in a tough economy where businesses and individuals have struggled to service loans.
Central Bank of Kenya (CBK) data shows that the average liquidity ratio for commercial banks stood at 59.8 percent at the end of August—up from 54.3 percent a year earlier—, the highest recorded and against a regulatory requirement of 20 percent.
The liquidity ratio captures the amount of cash or near cash assets held by banks in comparison to their short term deposits – reflecting how efficiently a bank is deploying customer savings to make profits.
The growing cash pile therefore shows that banks have been slow to convert deposits from customers to loans, with the ratio of loans to deposit shrinking to 71 percent compared to averages of over 85 percent in the pre-Covid-19 period.
The slowdown follows cautious lending by banks due to high defaults by businesses and individuals, with the stock of bad loans hitting a record Sh731.8 billion, or 17.6 percent of the total loans issued as at August.
Equity Bank Kenya, which released its third quarter results at the end of last month, had a liquidity ratio of 78.4 percent, with management stating it was seeking to issue more loans.
“It's a flat balance sheet reflecting the environment. We are trying very hard to give loans,” said Equity Group Chief Executive James Mwangi during an investor briefing on October 28.
“We have this Sh1 trillion shillings (in deposits) and if you look at our lending, we are lending only Sh400 billion, so we are left with Sh600 billion. I want to appeal to Kenyans that we understand the environment but there is hope (come borrow),” he added.
Cooperative Bank of Kenya, in its quarter three financials published on Sunday, disclosed a liquidity ratio of 59.3 percent, with a loan book of Sh381.9 billion against a deposit base of Sh511.4 billion.
Banks held Sh5.89 trillion in customer deposits in August while loans issued were Sh4.16 trillion. The industry loan book grew by three percent in the year to August while deposit grew at a faster pace of 4.7 percent leading to higher liquidity levels.
CBK has been pressuring banks to lower their interest rates so as to spur private sector lending which would trigger economic expansion. Slow credit growth has been a major concern of CBK’s monetary policy making committee for the last year which has seen it take diverse actions to push banks to lending more.
“Average lending rates in the domestic market have continued to decline, while private sector credit growth has continued to improve, though at a slower pace than desirable,” said the Monetary Policy Committee after its latest meeting on October 7.
CBK Governor Kamau Thugge also called on banks to stop making excuses and pass on the benefit of the monetary policy decisions to the public through lower interest rates.
Banks were charging an average interest rate of 15.07 percent for loans at the end of September, having dropped from 17.22 percent at the beginning of the year.
The decline tracked the CBK’s eight consecutive rate cuts that have brought the base rate to the current 9.25 percent from 13 percent in August 2024.
Businesses have also been shelving borrowing plans due to high interest rates charged by banks, hence the pressure from the CBK to banks to lower their loan prices.
At the same time, banks have had the alternative option of taking up risk free lending to government via bonds and Treasury bills, shielding themselves from losses due to the elevated default rate on customer loans.
“The high ratio is partly due to banks having parked most of their funds in government securities -and other highly liquid assets - with asset quality concerns leading to cautious lending,” said Melodie Ndanu, an analyst at Standard Investment Bank.
“In addition, the CBK put in place measures to spur lending to the private sector earlier in the year, for example the reduction of the cash reserve ratio, which helped free up liquidity,” she said.
CBK reduced the Cash Reserve Ratio for commercial banks to 3.25 percent from 4.25 percent in February a move that released an additional liquidity of Sh35.2 billion for banks to on lend but which is yet to flow into the economy.
The National Treasury has also been paying up pending bills which were main contributors to the piling bad loans. Contractors owed by national and county government were some of the main defaulters as they awaited pay to clear their loans.
For the banks however, keeping high liquidity in hand and piling cash into government securities risks sacrificing profit opportunities as customer loans earn them more than bonds and T-bills.
Banks profits in the eight months to August 2025 grew 12.3 percent compared to Sh203.4 billion compared to the corresponding period in 2024. The profit growth reflected wider interest margins as cost of deposits fell faster than the price of loans.
The difference between what banks charge for loans and pay deposits has hit its highest level in nine years at 7.44 percentage points allowing banks to post profit growth despite stunted balance sheets.
Banks have also been aggressive in collecting from defaulters with increased legal and auctioneering cases with such collections being write backs to their profit and loss accounts.
