The banking sector already finds itself walking a tightrope in 2025, as the latest data from the Central Bank of Kenya (CBK) reveal a troubling trend.
According to the CBK’s Credit Survey Report, gross loans increased in the first quarter of 2025 compared to the previous quarter, while total deposits declined.
The survey indicates that gross loans rose by 0.6 per cent, climbing from Sh4.10 trillion in December 2024 to Sh4.12 trillion in March 2025, while total deposits experienced a marginal decline of 0.2 per cent, settling at Sh5.73 trillion in March 2025 compared to Sh5.74 trillion in the previous quarter.
This upward trend in loans was primarily driven by increased lending in the personal and household, trade, and building and construction sectors, reflecting heightened demand for credit in these areas.
Despite the growth in loans, the asset quality of the banking sector showed signs of strain. The ratio of non-performing loans (NPLs) to gross loans worsened, rising from 16.4 per cent in December 2024 to 17.4 per cent in March 2025. This deterioration was due to a 6.6 per cent increase in gross NPLs, outpacing the 0.6 per cent rise in gross loans.
According to the survey, the personal and household sector was particularly affected, with respondents—senior credit officers across various financial institutions—anticipating a further rise in NPLs in the coming quarter.
In response, banks are already intensifying credit recovery efforts, with 84 per cent of the respondents focusing on the personal and household sector, followed by trade (76 per cent) and real estate (73 per cent). These measures aim to stabilise asset quality and mitigate risks in the face of economic uncertainties.
Liquidity in the banking sector has also improved, from 55.7 per cent in December 2024 to 58.4 per cent in March 2025. In fact, 78 per cent of respondents reported better liquidity positions, largely due to increased deposits (61 per cent), loan recoveries (22 per cent), and maturing government securities (15 per cent).
Banks plan to deploy this liquidity strategically, with 31 per cent intending to lend more to the private sector, while others are eyeing interbank lending (22 per cent), Treasury bills (19 per cent), and bonds (15 per cent).
According to the report, the enduring impact of the COVID-19 pandemic continues to shape the sector’s risk environment. Credit and operational risks remain elevated. However, on a positive note, banks appear to be adapting through digital transformation and enhanced risk management practices.
