Kenya’s commercial banks are pulling back from lending and parking their money in short-term government securities instead, as rising inflation and mounting loan default fears reshape how lenders are managing risk. At the same time, the Kenya Bankers Association is pushing the Central Bank of Kenya to raise interest rates at its upcoming Monetary Policy Committee meeting, arguing that firmer action is needed to rein in inflation before it becomes harder to control.
The shift reflects a broader nervousness spreading through Kenya’s banking sector. When lenders choose the safety of government securities over private sector loans, it signals that banks see more risk in the economy than their public statements typically acknowledge. For businesses and individuals hoping to access credit, the consequences are direct and immediate.
Treasury Bills Are Being Snapped Up at Record Rates
The scale of demand for Treasury bills tells the story clearly. At the June 4 auction, bids totalled KSh 54.6 billion against an offer of just KSh 24 billion, an oversubscription rate of 227.4 percent. Banks and other investors are not just drifting toward government paper. They are rushing toward it.
Rising yields are part of the attraction. As the Central Bank of Kenya has adjusted rates and inflation has pushed up return expectations, T-bill yields have become increasingly competitive compared to the risk-adjusted returns available from private sector lending. For a bank weighing a business loan against a government bill, the calculus is shifting decisively toward the latter.
Inflation Has Jumped Sharply in Just Two Months
The inflation picture has deteriorated faster than many analysts anticipated. Kenya’s inflation rate climbed to 6.7 percent in May, up from 4.4 percent in March, a jump driven primarily by supply disruptions and rising global oil prices tied to geopolitical tensions in the Middle East.
When fuel costs rise, the effect ripples through the entire economy. Transport becomes more expensive, which pushes up the cost of goods at every point along the supply chain. For households already stretched by a high cost of living, the squeeze leaves less disposable income for everything else, including loan repayments.
That is precisely what banks are worried about. Lenders fear that as fuel and food costs consume a larger share of household budgets, borrowers will deprioritise debt servicing in favour of basic daily expenses. That fear is driving the retreat from lending just as much as the attractive yields on government paper.
KBA Wants the CBK to Act on Rates
The Kenya Bankers Association has taken a clear position ahead of the upcoming Monetary Policy Committee meeting. The industry body is calling for a modest increase in the Central Bank Rate, arguing that proactive tightening now is preferable to a larger correction later if inflation expectations become unanchored.
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The KBA’s concern extends beyond domestic inflation. A higher import bill driven by expensive oil and a weakening shilling adds external pressure to an already stressed price environment. The association argues that raising the CBR would help stabilise inflation expectations, protect price stability, and signal to markets that monetary authorities are taking the situation seriously.
Whether the MPC agrees remains to be seen. Rate decisions involve balancing inflation control against the risk of further dampening economic growth and credit access in an environment where private sector borrowing is already slowing.
Private Sector Credit Is Feeling the Squeeze
The retreat from lending comes after a period of relative optimism in Kenya’s credit market. Average lending rates had eased to around 14.8 percent and private sector credit growth had picked up, raising hopes that businesses would have better access to the financing they need to grow and hire.
That window appears to be closing. As banks redirect liquidity toward T-bills and tighten their appetite for private sector risk, credit conditions for businesses and individuals are likely to become more restrictive in the months ahead. Small and medium enterprises, which typically have fewer financing alternatives than large corporates, will feel that tightening most acutely.
For policymakers at the CBK, the challenge is delicate. Raising rates to combat inflation risks further discouraging private sector borrowing. Holding rates risks allowing inflation to drift higher and eroding purchasing power further. The MPC’s decision at its upcoming meeting will be watched closely by banks, businesses, and households alike as one of the clearest signals yet of where Kenya’s monetary policy is headed for the rest of 2026.