Banks’ preference for government securities raises concern in market
By John Otini, July 28, 2025Kenya’s banking sector is on the spot after fresh data revealed that a significant share of customer deposits is being redirected into government securities, with top-tier banks allocating as much as 47 per cent of their funds to the debt instruments.
This shift, while profitable for the lending institutions, is raising concerns over the long-term implications for the economy—especially on private sector access to credit.
Data compiled from first quarter 2025 financial statements by business consultant and University of Nairobi tutorial fellow Ephraim Njega, paints a stark picture: banks are increasingly choosing state-backed investments over lending to the real economy.
KCB Bank, which leads the industry by deposits, had over Ksh1 trillion in customer funds, with Ksh307 billion—31 per cent—invested in government securities.
Equity Bank’s exposure was even higher at 47 per cent, amounting to Ksh305.6 billion out of Ksh648.8 billion in deposits.
Co-operative Bank stood at 46 per cent, while NCBA and DTB trailed closely at 42 per cent each.
This trend has triggered concern among investors, analysts, and business leaders, who argue that excessive lending to the government is undermining Kenya’s productive sectors.
As Sakwa Emmanuel, CEO of Orbit Capital, bluntly put it: “GoK as a single customer taking more than 40 per cent of cash deposits from commercial banks.”
His comment highlights the broader fear—that public borrowing is crowding out private enterprise and distorting the banking sector’s priorities.
Financial economist Dennis Mutua suggests the pattern reflects a flight to safety.
“It raises the question—are banks pricing at risk or avoiding it altogether?” he asks, noting the lure of government securities offering attractive interest rates with virtually no default risk.
In contrast, lending to individuals and SMEs presents regulatory burdens, higher compliance requirements, and growing exposure to non-performing loans.
Indeed, credit risk remains a core concern. KCB, for example, recorded Ksh233 billion in non-performing loans as of March 2025—equivalent to 23 per cent of its deposits.
While the bank’s shareholder capital stood at Ksh297 billion, the sheer volume of bad debt underscores why institutions are leaning into government lending.
For banks, safety has become a strategy, and the government is offering that.
But this comes at a cost with the SME sector—long regarded as the backbone of economic growth— now grappling with limited financing options.
Stalled expansions
Kamau Mwangi, a businessman in Kisumu, warns that the consequences are visible: stalled expansions, delayed payrolls, and missed opportunities.
“Economic growth demands investment in productive ventures, not just risk-averse returns,” he says.
Joan Gachanja, a foreign exchange manager, warns that overexposure to government securities is squeezing the very businesses banks were meant to support.
“Not very good, considering banks should be lending to SMEs and MSMEs to spur real economic growth,” she says.
With no track record or collateral, most startups and community-level enterprises are now effectively shut out of the credit market.
The implications for financial stability are also troubling. David Kubai, a trade finance consultant, cautions that such concentrated lending could be dangerous.
“A single panic could kick off bank runs in Kenya,” he notes, especially if there are signs of fiscal instability or payment delays from the government.
Depositors, increasingly aware of how their savings are being deployed, may not wait around to see how such scenarios unfold.
There are those who defend the strategy. Robert Yawe points out that domestic borrowing is better than relying on foreign debt, saying, “Better that them taking it from the World Bank.”
But others argue that the cost of crowding out innovation and private sector expansion is far greater.
“Government securities have become the default investment option for most institutions; however, this has come at the expense of many SMEs,” says Cliffe Murithi, a business finance strategist.
Even within banking circles, there’s a sense of unease. Senior professionals like Kumar Dandapani describe it as a missed opportunity.
“Banks should be positioned to take risks; that’s the nature of business. So much of liquidity not deployed into market is not good for the economy,” he observes.
And when lending stalls, so do jobs, investments, and household income growth. Banks, for their part, maintain that in a tough economic climate, prudence matters.
Institutions like Equity, Stanbic, and Co-operative banks argue that government securities help deliver stable returns to shareholders while managing growing credit risk.
But as Sakwa replied in a recent exchange, “An overburdened customer is always handled with caution; you can’t push him/her further, and you can’t rest. You have to reschedule due to loans. Quagmire!”
The bottom line is clear: until banks are incentivised to resume lending to productive sectors, Kenya’s economy will continue to struggle with underinvestment, slow growth, and widening inequality.
With public debt mounting and credit pipelines shrinking, the question remains—when will the scales tip back toward the real economy?