Kenya Banking Sector Report — Q4 2024

Macro and policy: easing begins, lending rates lag

The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) lowered the Central Bank Rate (CBR) to 12.00% at its meeting on 8 October 2024. It cited a sharp deceleration in credit to the private sector and slower growth in the second quarter of 2024. At its meeting on 5 December 2024 it cut the rate again, from 12.00% to 11.25%. The two cuts, of 75bp each, took the reduction in the fourth quarter to 150bp. The October decision came after growth in commercial bank lending to the private sector slowed to 1.3% in August 2024, from 3.7% in July.

Headline inflation eased to 2.8% in the fourth quarter of 2024 from 4.1% in the third quarter. Overall inflation was 3.0% in December 2024, below the mid-point of the 5±2.5% target range. Real GDP grew by 4.0% in the third quarter of 2024, against 6.0% a year earlier. The Economic Survey 2025 put growth for 2024 as a whole at 4.7%, down from 5.7% in 2023.

Money market rates responded quickly. The average 91-day Treasury bill rate fell to 10.32% in December 2024 from 15.75% in September, and the weighted overnight interbank rate fell to 11.45% from 12.67%. That was a fall of 543bp in the 91-day rate over the quarter. Bank lending rates did not follow: the average lending rate rose from 16.91% in September 2024 to 17.22% in November before easing to 16.89% in December. Over the quarter it was therefore broadly unchanged, while the CBR fell from 12.75% to 11.25%. Average deposit rates fell to 10.45% in December from 11.24% in September, so the spread between lending and deposit rates widened to 6.44% from 5.67%.

In December the MPC observed that short-term rates on government securities had fallen sharply in line with the CBR but that banks had not lowered their rates proportionately. The pattern points to a transmission gap concentrated in bank loan pricing rather than in the money market.

The MPC kept easing into 2025, cutting the CBR to 10.75% in February, 10.00% in April, 9.75% in June and 9.50% on 12 August 2025. In February it also cut the cash reserve ratio by 100bp to 3.25%. The MPC said the cut would release additional liquidity to banks and was expected to lower the cost of funds and lending rates and support private sector credit. By April it noted that average lending rates had been declining gradually since December 2024, but that private sector credit growth remained subdued. The sequence shows how slowly lower policy rates passed through to the loan book, a theme that runs through the rest of this report.

System balance sheet: modest growth, a smaller foreign currency book

At 31 December 2024 the sector comprised 38 commercial banks and one mortgage finance company, supervised by the CBK. The nine banks in the large peer group had a combined weighted market share of 75.6%, down from 76.6% a year earlier. The medium peer group's share rose to 16.7% from 15.0%, while the small group's fell to 7.7% from 8.4%.

Banking sector total assets rose by 1.0% in the fourth quarter to KSh7,645.8bn in December 2024, from KSh7,568.4bn in September. Gross loans rose by 0.9% to KSh4,099.3bn and total deposits by 1.0% to KSh5,739.6bn. The increase in assets was mainly in government securities, which rose by KSh187.5bn, or 9.1%. Gross loans fell to 53.6% of total assets in the quarter ended 31 December 2024, from 53.7% in the quarter ended 30 September.

Local currency deposits rose by KSh143.9bn, or 3.6%, to KSh4,169.2bn in the fourth quarter of 2024, while foreign currency deposits fell by KSh88.3bn, or 5.3%, to KSh1,570.4bn. Lending to the private sector contracted by 1.4% year on year in December 2024, which the CBK attributed mainly to valuation effects on foreign currency loans after the shilling appreciated, and to weaker demand because of high lending rates. Local currency loans grew by 2.1%, while foreign currency loans, about 26% of the total, contracted by 11.4%. On a quarterly basis, credit to the private sector rose by 1.8% in the fourth quarter of 2024, after a 0.2% contraction in the third.

In the CBK's credit officer survey, perceived demand for credit was unchanged in nine economic sectors in the fourth quarter of 2024 and rose in trade and in personal and household lending. Credit standards were unchanged in all sectors. Banks said they intended to deploy additional liquidity mainly to private sector lending (35%), Treasury bills (21%), interbank lending (18%) and Treasury bonds (15%).

On the published financial statements used in the CBK's Bank Supervision Annual Report, total net assets fell by 1.6% over 2024 to KSh7,568.0bn, as loans and advances fell by KSh160.3bn. Customer deposits fell by 2.1% to KSh5.5tn. Net loans and advances, government securities and other assets made up 48.1%, 27.9% and 9.9% of total net assets at the end of the year. Read together, the two data sets show loan books shrinking over the year as a whole and government securities driving growth in the final quarter.

Banking sector indicators, September and December 2024

Source: Central Bank of Kenya, Commercial Banks Credit Officer Survey for the Quarter Ended December 31, 2024, 17 February 2025; Central Bank of Kenya, Kenya Quarterly Economic Review, October-December 2024, 29 April 2025.

Credit and asset quality: a pause, not a turn

The gross NPL ratio edged down to 16.4% in December 2024 from 16.5% in September, as gross NPLs rose by 0.5% while gross loans grew by 0.9%. Gross NPLs rose to KSh672.6bn from KSh669.5bn. NPLs rose by KSh6.9bn in transport and communication, real estate, tourism, building and construction, and energy and water, but fell by KSh3.9bn in mining and quarrying, trade, agriculture and manufacturing, mainly through repayments.

Coverage weakened. The ratio of specific provisions to total NPLs fell to 37.4% in the fourth quarter of 2024 from 38.9% in the third, and net NPLs rose to 8.7% of gross loans from 8.4%. This suggests the small improvement in the headline ratio came from loan growth rather than from a fall in problem loans.

The CBK's Bank Supervision Annual Report, which draws on banks' and mortgage finance companies' published financial statements, gives a higher figure. On that basis the gross NPL ratio rose to 17.1% in December 2024 from 15.6% a year earlier, with the stock of NPLs up 7.0% to KSh697.3bn. Loans classified as doubtful rose to 9.4% of the loan book from 7.8%, while the watch category fell to 10.4% from 12.0%. The shift suggests loans were moving from early arrears into deeper default categories rather than curing. Trade, real estate, manufacturing, and personal and household lending accounted for 72.5% of the value of NPLs.

Banks expected NPLs to rise in personal and household lending in the quarter ending 31 March 2025. The system-wide ratio did deteriorate: it reached 17.4% in March 2025 and 17.6% in June 2025, according to the CBK's quarterly credit officer surveys. The CBK's own sector outlook had warned that credit risk would stay elevated in the short to medium term.

Capital and liquidity: strong in aggregate, weak at the margin

The capital adequacy ratio rose to 19.4% in December 2024 from 19.1% in September, against a minimum of 14.5%. Core capital rose by 2.4% in the fourth quarter of 2024 to KSh969.5bn, lifting the ratio of core capital to risk-weighted assets to 17.1% from 16.7%. The ratio of core capital to deposits was 16.9%, against a minimum of 8%.

On published financial statements, total capital was 19.6% of risk-weighted assets in December 2024, up from 18.6% a year earlier, and core capital was 17.3%. Capital and reserves rose by KSh202.7bn, or 20.7%, to KSh1,183.6bn over the year.

Aggregate ratios hide a weak tail. At 31 December 2024 three commercial banks failed to hold the minimum core capital of KSh1bn, and five failed the 14.5% total capital and 10.5% core capital ratios. Nine banks breached the single obligor limit of 25% of core capital. Eleven banks were in violation of the Banking Act or the CBK's prudential guidelines at the end of 2024, against twelve a year earlier. In the CBK's CAMEL ratings, 11 institutions were rated strong, 18 satisfactory, 8 fair, and 1 each marginal and unsatisfactory. Microfinance banks were weaker still: their combined pre-tax loss widened to KSh3.5bn in 2024 from KSh2.4bn, and only four of the 14 licensed institutions were profitable.

The liquidity ratio rose to 55.7% in December 2024 from 54.6% in September, against a statutory minimum of 20%. In the credit officer survey, 77% of respondents said their liquidity position had improved in the quarter. On published financial statements, the average liquidity ratio was 56.0% in December 2024, against 51.0% a year earlier. Three banks were below the 20% minimum liquidity ratio at the end of 2024. High liquidity alongside flat lending is consistent with banks favouring government paper over private credit during the quarter.

Profitability: a weaker fourth quarter in a strong year

Quarterly pre-tax profit fell by KSh5.7bn to KSh58.5bn in the fourth quarter of 2024, from KSh64.2bn in the third. The CBK attributed the fall to a KSh8.6bn increase in quarterly expenses against a KSh2.9bn increase in income, with other expenses up KSh14.3bn. Return on assets slipped to 2.8% from 3.0%, and return on equity to 22.0% from 24.9%. Interest on loans and advances provided 51.0% of income in the quarter, interest on government securities 25.4% and other income 13.6%.

For the full year, pre-tax profit rose by KSh41.0bn to KSh260.3bn, from KSh219.3bn in 2023, on published financial statements. Total income rose by 17.2% to KSh1,054.4bn, led by interest on advances, which rose by KSh104.8bn. Funding costs rose faster: interest expense increased to 36.6% of income from 31.2%. The bad debts charge fell to KSh83,733m from KSh109,649m, a reduction of KSh25,916m. Lower impairment charges therefore did much of the work in 2024 earnings, even as asset quality worsened. With interest expense growing faster than income, margins were under pressure before lower policy rates had fed through to deposit costs.

Earnings were concentrated. The large peer group of nine banks earned 89.3% of the sector's pre-tax profit in 2024, up from 84.7% in 2023. Its pre-tax profit rose to KSh232bn from KSh186bn, while the medium group's fell to KSh27bn from KSh30bn and the small group's to KSh1bn from KSh4bn.

Large peer group banks, December 2024

Source: Central Bank of Kenya, Bank Supervision Annual Report 2024, 8 August 2025.

KCB Bank Kenya and Equity Bank Kenya held 16.9% and 13.6% of the sector's total net assets. Together that is 30.5% of the market. Profitability recovered in 2025: quarterly pre-tax profit rose to KSh73.5bn in the quarter ended March 2025 and KSh74.6bn in the quarter ended June 2025.

Regulation: a higher capital floor and credit pricing reform

Minimum capital

The Business Laws (Amendment) Act, 2024 was assented to on 11 December 2024 and took effect on 27 December 2024, amending the CBK Act, the Banking Act and the Microfinance Act. It raises the minimum core capital for commercial banks and mortgage finance institutions from KSh1.0bn to KSh10.0bn, phased in over five years. The schedule requires KSh3.0bn by 31 December 2025, KSh5.0bn by 31 December 2026, KSh6.0bn by 31 December 2027, KSh8.0bn by 31 December 2028 and KSh10.0bn by 31 December 2029. The Act also lets penalties for breaches of the Banking Act reflect the benefit derived or loss avoided, capped at three times the gross gain. Amendments to the CBK Act in 2024 also widened the framework for digital credit providers to cover all non-deposit taking credit providers. With three banks below even the old floor at the end of 2024 and the small peer group barely profitable, the higher requirement points to capital raising, mergers or exits among smaller lenders.

Credit pricing

In February 2025 the MPC noted that the CBR had been lowered substantially since August 2024 while lending rates had declined only marginally. The CBK said it had begun on-site inspections to check that banks were cutting rates in line with the Risk-Based Credit Pricing Model, introduced in 2019. It added that banks which did not pass on lower funding costs would be penalised under the amended Banking Act. In April 2025 it published a consultative paper proposing the CBR as the common reference rate, with each bank's lending rate set as the CBR plus a premium ("K") whose components the CBK would publish. The paper found that most banks used a 6 to 12 month average cost of deposits to compute their cost of funds, so credit prices stayed high despite CBR cuts. The CBK also noted that some banks had not implemented their risk-based pricing models as envisioned, and it asked for comments on the paper by 2 May 2025. The Kenya Bankers Association had proposed on 10 April 2025 an alternative Kenya Base Rate anchored on the interbank rate. In August 2025 the MPC was briefed on a proposed revised risk-based credit pricing model.

Liquidity rules and other measures

The CBK circulated draft guidelines on the liquidity coverage ratio, net stable funding ratio and leverage ratio to banks in November 2024 and received comments in December 2024. It issued the final guidelines in April 2025. They require banks to hold enough high-quality liquid assets to survive 30 days of acute stress, and to meet a 4% leverage ratio at all times. In April 2025 the MPC also narrowed the interest rate corridor around the CBR to ±75bp from ±150bp, and set the discount window rate at the upper bound of that corridor. The Financial Action Task Force (FATF) placed Kenya on its grey list on 23 February 2024. Gross outstanding loans of digital credit providers rose by 91% to KSh55.2bn in 2024.

Risks and outlook

By August 2025 policy easing was reaching borrowers. Average lending rates fell to 15.2% in July 2025 from 17.2% in November 2024, and private sector credit growth recovered to 3.3% in July 2025 from -2.9% in January 2025. That was a fall of 200bp in average lending rates from their November 2024 level. The CBR stood at 9.50% after the 12 August 2025 meeting, 175bp below its level after the December 2024 cut.

Asset quality remains the main risk. The gross NPL ratio was 17.6% in June 2025, against 16.4% in December 2024. The fourth-quarter improvement therefore looks like a pause in deterioration rather than a turn.

Capital buffers continued to build: the capital adequacy ratio rose to 20.1% in March 2025 and 20.4% in June 2025. The first step of the higher capital floor, to KSh3.0bn, falls due on 31 December 2025. System buffers look ample; the test of the new floor will fall on smaller banks.

The MPC projected growth of 5.2% in 2025 and 5.4% in 2026. The CBK's sector outlook also flagged elevated operational risk from rising cyber security threats. The final shape of the revised credit pricing model will decide how quickly further CBR cuts reach borrowers. For banks, falling lending rates, a higher NPL ratio and a rising capital floor will test smaller lenders more than the large peer group, which already earns most of the sector's profit.

Primary sources: Central Bank of Kenya, Kenya Quarterly Economic Review, October-December 2024, 29 April 2025; Central Bank of Kenya, Commercial Banks Credit Officer Survey for the Quarter Ended December 31, 2024, 17 February 2025; Central Bank of Kenya, Bank Supervision Annual Report 2024, 8 August 2025; Central Bank of Kenya, Commercial Banks Credit Officer Survey for the Quarter Ended June 2025, 8 August 2025; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, December 5, 2024 (MPC lowers the CBR to 11.25 percent), 5 December 2024; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, October 8, 2024 (MPC lowers the CBR to 12.00 percent), 8 October 2024; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, February 5, 2025 (MPC lowers the CBR to 10.75 percent), 5 February 2025; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, June 10, 2025 (MPC lowers the CBR to 9.75 percent), 10 June 2025; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, April 8, 2025 (MPC lowers the CBR to 10.00 percent), 8 April 2025; Central Bank of Kenya, Press Release: Monetary Policy Committee Meeting, August 12, 2025 (MPC lowers the CBR to 9.50 percent), 12 August 2025; Central Bank of Kenya, Commercial Banks Credit Officer Survey for the Quarter Ended March 2025, 23 May 2025; Central Bank of Kenya, Consultative Paper on Review of the Risk-Based Credit Pricing Model (April 2025), 22 April 2025; Central Bank of Kenya, Press Release: Issuance of a Consultative Paper on the Review of the Risk-Based Credit Pricing Model, 23 April 2025; Central Bank of Kenya, Guidelines on the Liquidity Coverage Ratio, Net Stable Funding Ratio and Leverage Ratio (CBK announcement), 17 April 2025.