Why Kenyans are shying away from bank loans

Local banks now say harsh economic conditions have slowed down credit uptake among households and businesses despite the drop in interest rates. 

The banks said yesterday that while they are awash with cash available for lending to the private sector, eroded purchasing power following successive tax hikes in the recent past, and pressure to increasingly foot bills for services such as health and education are stifling credit uptake.

Commercial banks have in the past been criticised for refusing to lend to households and businesses, instead preferring to lend to the government, which is seen as risk-free.

KBA, however, said the sector has, in recent months, slowed its lending to the government.

Data from the National Treasury’s debt management office shows banks’ holdings of government securities reduced to 37 per cent in the year to June 2025, compared to 51.6 per cent in 2021. 

Raimond Molenje, chief executive, KBA, pointed to deeper problems within the economy that are seeing credit to the private sector fail to pick up at a faster rate than was expected following the reduction in interest rates. 

Among the factors that he cited was a high debt servicing rate that has resulted in denied funding to sectors such as healthcare and education, leaving Kenyans to pay out of pocket.

Kenyans have also had to grapple with higher taxes and levies in recent years, further robbing them of purchasing power, with the result being reduced demand for goods and services from private sector firms. 

“At the moment, there is no crowding-out effect. That was a concern two years ago,” said Molenje, adding that since June last year, the amount that banks are channelling to government securities has further reduced from 37 per cent, as seen in Treasury’s debt report, to under 35 per cent.

He was speaking at the debt forum convened by the Institute of Public Finance (IPF) in Nairobi. “The problem is where the economy is… businesses and individuals have no ability to be able to borrow at the interest rates that are there in the market. That’s a critical thing that we need to address.  Our debt servicing is running so fast, leaving behind revenue generation. We need to look at how to reverse that… to generate more revenue and then be able to balance down the debt service. “As a company, you might be able to borrow and put up a good business, but no one is coming to buy. We need to create a demand within the economy.”  

KBA has proposed a downward review of pay-as-you-earn (PAYE) tax bands to raise the minimum taxable personal income from the current Sh24,000 to Sh30,000 while capping PAYE at 30 per cent from the current 35 per cent that high-income earners pay. 

It noted that this would help grow the purchasing power of many Kenyans, which has in recent years been eroded owing to multiple taxes and levies the government has imposed. 

The Association made the proposals against the National Treasury’s invitation for comments from Kenyans on tax policies to inform the Finance Bill 2026.

KBA argued that lowering the tax bands will widen the tax base and increase revenue to the government while encouraging savings and investment in businesses.

Molenje reiterated the call, noting that revising PAYE “downwards would create a demand within the economy because we can only manage debt by generating more revenue, and that revenue needs to come from primary production.