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Banks face bumpy ride on subdued credit demand
Sluggish credit demand is squeezing banks' net interest income as shrinking loan books force lenders to auction assets like vehicles and homes to recoup losses.
Commercial banks have taken a hit in their core lending business amid subdued demand for credit, even as lending rates and the industry's non-performing loans remain stubbornly high.
The slump in credit demand has put pressure on banks' net interest income (NII) as their loan book shrinks even as lenders step up auctions of assets, including motor vehicles and homes, to recover loan losses.
Three of the five tier one banks to have disclosed their six-month earnings to June 2025 so far have seen their loan books fall as repayments grow faster than new loan disbursements.
Stanbic Bank Kenya's net loans and advances fell by Sh5.1 billion in six months to June to Sh233 billion from Sh238.1 billion previously, while Equity Bank Kenya's loan book narrowed by Sh8.6 billion in the same period.
Absa Bank Kenya's net loans and advances, meanwhile, fell by Sh11.4 billion from Sh316.3 billion to Sh304.9 billion. The perceived demand for credit in the second quarter of 2025 remained unchanged in nine of 11 economic sectors according to the latest Central Bank of Kenya (CBK) credit survey, further mirroring poor demand for new loans.
The total industry gross loans rose by just 0.6 percent between March and June 2025 to Sh4.14 trillion from Sh4.12 trillion previously. This has been despite the slow unwinding of high interest rates, which has been anchored by cuts to the Central Bank Rate (CBR).
Absa Bank Kenya CFO Yusuf Omari says demand for credit is not automatic even with a drop in borrowing costs, as borrowers will initially take advantage of lower interest rates to first pay off old debt.
“Customers have not shied away from getting our facilities. What they did when interest rates were high is they went for short-term loans, but their repayments were impacted by the high costs,” he said.
“What is happening now is that customers are pumping in repayments with a significant component of that going towards the principal instead of interest, as was the case previously. Over time, this will increase the capacity to borrow, and we are likely to see a sharp rise in borrowing, especially for households in the next 12 months.”
Private sector credit growth has remained suboptimal at 3.3 percent in July 2025 but is considerably higher than the contraction of 2.9 percent in January this year.
Average commercial banks’ lending rates have only declined marginally to 15.2 percent in July from 15.3 percent in June.
Lenders have stepped up their recovery efforts to ease the asset quality deterioration as gross non-performing loans remain unchanged at 17.2 percent of gross loans as of July from June.
“For the quarter ending September 30, 2025, banks expect to intensify their credit recovery efforts in all economic sectors with the aim of improving the overall quality of the asset portfolio,” CBK said.
A rebound in private sector credit growth is, however, expected to ease NPLs by lifting the denominator of gross loans.
“The NPL ratio is a ratio of two factors, where there is also an element of gross loans. When lending starts to pick up, the non-performing loans ratio will begin falling,” added Mr Omari.
KCB Bank Kenya and the Co-operative Bank of Kenya defied the shrinking loan book trend to grow loans and advances to customers over the half-year period by Sh98.8 billion and Sh8.7 billion, respectively.
