Commercial banks share of bad loans fell to a 44-month low 13.9 percent in September 2026, mirroring improved loan repayments and credit affordability in an economy that’s showing resilience against the Middle East shock as it is expected to grow at a faster rate than previously assumed.
The share of industry bad loans fell from 14.8 percent in June 2026, from a higher 16.92 percent during the same period in September 2025, as per data from the Central Bank of Kenya (CBK) and now stands at the lowest level since January 2023.
Loan affordability has eased during the period, with the average commercial bank lending rate falling to 14.4 percent in September 2026 from a peak of 17.2 percent in November last year.
Private sector credit growth has strengthened to 10.6 percent in September, marking the third consecutive month of double-digit credit growth since July this year.
CBK has revised its 2026 growth outlook to 5 percent from 4.9 percent as it sees a stronger industry and services sector than previously expected. The upgrade which points to an expansion of activity in the economy points to continued private sector credit growth which will further weigh down non-performing loans (NPLs) as overall lending improves.
Bad loans are usually arrived at by dividing total gross loans from delinquencies, implying that the ratio of NPLs improves with the underwriting of more new loans.
As such, the economy usually records higher NPL levels during periods of constrained lending.
‘The ratio of gross NPLs to gross loans stood at 13.9 percent in September 2026, down from 14.8 percent in June 2026, and 17.6 percent in August 2025. Decreases in NPLs were noted in the financial services, agriculture, trade and energy and water sectors. Banks have continued to make adequate provisions for the NPLs,’ CBK said.
The faster than expected growth of the Kenyan economy this year is expected to support credit demand as businesses seek to expand while household disposable income stands to benefit from increased hiring by firms.
Combined, the factors are expected to improve loan affordability for businesses and households with existing loans-driving down NPLs further-while prevailing low interest rates will anchor demand for new credit.
CBK’s upward growth revision has coincided with a growth upgrade by the World Bank Group which now sees the Kenyan GDP expanding at a faster 4.6 percent from 4.4 percent previously.
‘Industrial sector growth is expected to remain strong on account of a robust construction sector, driven by the private sector, the affordable housing programme, ongoing infrastructure projects, continued settlement of pending bills and implementation of Public Private Partnerships (PPPs),’ CBK added.
Increased digitisation is expected to anchor the services sector growth. CBK expects improved credit uptake across key sectors especially trade, building and construction, finance and insurance and consumer durables sectors.
The monetary authority however notes that the outlook remains subject to risks including prolonged geopolitical tensions and elevated trade policy uncertainties. CBK also cites the potential severe impact of the El Nino weather phenomenon to be a risk to growth.
Commercial banks have continued to cut borrowing costs even after rate pauses by CBK, anchoring prolonged loan affordability by businesses and households. The average commercial bank lending rate has fallen from 14.78 percent in February 2026 to 14.4 percent in September, even as the Central Bank Rate (CBR) holds unchanged at 8.75 percent.
Banks have described the current environment as less restrictive, supporting the window for increased lending to the private sector.
The industry previously expected a hold in the monetary policy rate at 8.75 percent to remain accommodative to both the anchoring of inflationary expectations and supporting growth.
‘These developments are expected to lower expectations of an increase in funding and benchmark pricing costs, thereby creating scope for lending rates to continue declining in the near term,’ the Kenya Bankers Association (KBA) said in a research note.
‘Consequently, improved affordability of credit should reinforce the recovery in credit growth although the pace of transmission will depend on the evolution of credit risk. In this regard, we view that maintaining the current stance would be appropriate in supporting the ongoing private sector credit growth and supporting economic activity.’
Inflation is expected to remain an Achilles heel to both growth and the outlook for non-performing loans as the Middle East crisis, which has impacted global oil prices, remains an ongoing concern.
CBK expects Kenya’s inflation to hold below the upper limit of 7.5 percent, peaking at 7.2 percent in December 2026 before easing subsequently.
The expectation for above average rainfall in the fourth quarter of 2026 is seen improving agricultural output while offsetting the impact of higher pump prices to keep inflation within the target range.
‘Overall inflation is expected to remain within the target range in the near term, supported by appropriate monetary policy actions, government interventions including subsidies and reduction of VAT on fuel and exchange rate stability which is expected to continue moderating the impact of imported inflation,’ Kamau Thugge, CBK Governor said last week.
Monetary Policy Committee surveys conducted in the month of September showed that inflation expectations remained anchored within the target range despite the effects of high energy prices.