Commercial banks are bracing for an uptick in personal loan defaults in the coming quarter, amidst resistance by the lenders to cut interest despite signals by the central bank to do so.

The Central Bank of Kenya’s (CBK) June 2025 Credit Officer Survey shows lenders expect non-performing loans (NPLs) in the personal and household segment to rise more than in any other sector, highlighting growing repayment stress among individual borrowers.

According to CBK, 44 per cent of bank credit officers surveyed indicated that NPLs in the personal and household sector would increase in the third quarter of 2025, compared to 38 per cent in the previous quarter. Only 17 per cent expect defaults to remain constant while 39 per cent project a decline. “Respondents indicated that the level of NPLs is expected to remain constant in 10 economic sectors but increase in the personal and household sector during the next quarter,” the report stated.

The CBK noted that these expectations come despite banks maintaining their lending criteria. In the second quarter of 2025, credit standards for all eleven monitored sectors including manufacturing, trade, real estate, and agriculture were unchanged.

“In the second quarter of 2025, credit standards remained unchanged in all economic sectors,” the report said, indicating that lenders are not tightening or easing access to credit even as they forecast higher default risks among households.

Sector-specific data shows that other industries, such as real estate, building and construction, and manufacturing, are also expected to record a rise in NPLs, but at lower rates than the personal and household category.

In real estate, 34 per cent of respondents anticipate higher defaults, while 35 per cent of lenders expect building and construction loans to soar. By comparison, defaults in manufacturing are projected to rise by 34 per cent of respondents, while 42 per cent expect stability.

The CBK survey attributes much of the anticipated pressure in personal lending to increased working capital needs and possible income strains among households.

Demand for credit in the personal and household segment rose sharply in the second quarter, with half of the surveyed banks reporting increased loan applications, up from 39 per cent in March 2025. However, while the demand was met with unchanged lending standards, repayment ability may not keep pace.

Bank credit officers have also identified that NPLs in the personal and household sector are more sensitive to shifts in employment, income, and living costs than corporate loans.

This makes the category a leading indicator of stress in consumer finances. In sectors such as trade and real estate, while repayment pressures exist, they are often linked to broader business cycles and investment conditions, rather than individual cash flow constraints.

Sector asset quality

Data from the CBK further shows that as of June 2025, Kenya’s banking sector asset quality had deteriorated slightly, with the gross NPL ratio rising to 17.6 per cent from 17.4 per cent in March.

This was driven by a 1.6 per cent increase in gross NPLs against a 0.6 per cent growth in gross loans. Gross loans rose to Sh4.15 trillion, while NPLs increased at a faster rate, signalling that repayment challenges are not confined to households alone.

While the CBK survey does not prescribe policy changes, it underscores the importance of credit recovery strategies. For the quarter ending September 30, 2025, banks plan to intensify their recovery efforts in all sectors, with the personal and household category topping the list at 84 per cent of respondents indicating an aggressive push.

Trade follows at 79 per cent, real estate at 78 per cent, and building and construction at 76 per cent. The unchanged lending standards also reflect a balancing act by banks, which are seeking to sustain lending momentum without exposing themselves to undue risk.

In the personal and household segment, 24 per cent of respondents reported easing lending terms in Q2, but an equal proportion said they had tightened, while the majority 54 per cent kept terms the same.

This stability in credit standards, even in the face of anticipated defaults, suggests banks may be relying more on post-disbursement recovery measures rather than pre-loan restrictions.

The CBK survey covers responses from 38 commercial banks and one mortgage finance company, representing the bulk of Kenya’s formal lending market.

The questions are framed to capture changes over the past quarter and expectations for the next, with a focus on demand for credit, credit standards, asset quality, and recovery efforts.

Kenya’s banking sector ended June 2025 with a total asset base of Sh7.85 trillion, a 2.3 per cent rise from Sh7.67 trillion in March. Deposits rose 2 per cent to Sh5.85 trillion, while quarterly profits before tax increased slightly to Sh74.6 billion.

Liquidity remained high at 58.6 per cent, well above the statutory minimum of 20 per cent.

In the context of these strong liquidity levels, the anticipated increase in personal loan defaults raises questions about the resilience of household borrowers amid economic pressures.

For now, banks appear committed to keeping credit flowing, even as they prepare for a more challenging repayment environment in the months ahead.