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Manufacturing bucks bad loans trend as banks battle defaults
Banking insiders have argued that the improvement in NPLs for manufacturing is not because activities in that sector have rebounded, but shows that it probably absorbed impairment pain earlier.
Manufacturing bucked a trend of ballooning bad loans in the banking sector in the year ended June 2025, becoming the only major segment in the credit market with improving loan quality.
Non-performing loans (NPLs) in the manufacturing sector dropped 4.5 percent to Sh123.7 billion at the end of June from Sh129.5 billion a year earlier, an analysis of latest Central Bank of Kenya (CBK) report on banking sector asset quality trends show.
The easing of the bad loans for the sector marked a rare reversal in an industry where total NPL stock rose by Sh70.8 billion over the 12-month period. Total bad loans for the banking sector jumped 10.8 percent to Sh728.5 billion from Sh657.7 billion in June 2024.
The growth in NPL was higher than the 2.6 percent rise in industry gross loans to Sh4.1547 trillion in the review period, underlining that the industry is facing more of a credit quality problem than a supply challenge.
Bankers say the credit quality squeeze reflects broad weakness in the economy, despite interest rate relief touched off by successive easing of the benchmark interest rates by the CBK’s Monetary Policy Committee.
Since August 2024, the CBK has cut the benchmark rate from 13 percent to 9.25 percent, signaling commercial lenders to ease borrowing costs for businesses and households.
“There is a correlation between the average asset quality in the industry and the quality of the economy,” Moses Muthui, director of consumer banking at Absa Kenya, said last month.
“We are dealing with the lag effect of high interest last year. That has not washed out yet. There are inherent weaknesses in parts of the economy.”
Banking insiders have argued that the improvement in NPLs for manufacturing is not because activities in that sector have rebounded, but shows that it probably absorbed impairment pain earlier.
Lenders have been pushing through aggressive loan restructuring cycles from 2023, supported by collateral rules and partial write-downs of legacy exposures.
“Our recovery teams have enhanced recovery efforts, rehabilitation or restructuring to ensure that our customers' cash flow matches what we are asking them to pay ... .and we have done some write-offs,” Lawrence Kimathi, KCB Kenya Group’s Finance Director, told an investor briefing in August.
KCB’s NPLs data showed that bad loans held by manufacturing firms dropped to Sh41 billion in June 2025 from Sh49 billion a year earlier.
The CBK data indicate firms in the transport and communication sector posted the sharpest deterioration in the review period, with NPLs jumping 36.1 percent year-on-year to Sh56.5 billion.
This came as the lender cut exposure to the sector by 4.7 percent to Sh326 billion in June 2025 compared with a year earlier, reflecting a pull-back from loss-making PSVs, trucking and cross-border logistics clients.
Households —the single biggest borrower class— saw bad loans rise 17.1 percent to Sh110.8 billion from Sh94.6 billion the year before, followed by traders who recorded a 16.8 percent bump in NPLs to Sh167.9 billion.
Bad loans in real estate increased 15.1 percent to Sh131.6 billion, reflecting struggle by developers and landlords, particularly in Nairobi’s upmarket areas, to find buyers for commercial properties with prices largely flat in recent years.
The NPLs in the building and construction sector also remained in the double-digit growth territory, climbing 15 percent to Sh51.4 billion.
That underscores liquidity distress among small and medium contractors, including road sub-contractors, caught in delayed settlement cycles for government-funded projects.
Agriculture, which is prone to climate-linked shocks, including floods of 2024, saw bad loans edge up 3.1 percent to Sh33.1 billion.
Banks have expanded restructuring, rehabilitation and recovery efforts this year through what aligns repayment schedules with customer cash flows with some executing selective write-offs.
The sector-wide NPL ratio hit 17.6 percent in the second quarter of 2025 from just 16.3 percent a year earlier, before easing slightly to 17.1 percent by the end of September.
