- EBC warns Kenya’s Ksh 995.7 billion domestic borrowing plan could push banks towards government securities, tightening credit terms for small businesses.
- The brokerage says increased demand for government debt may lead to stricter collateral requirements, shorter repayment periods and reduced lending flexibility for MSMEs.
- Despite private sector credit growth, EBC cautions that smaller businesses may struggle to access financing as banks prioritise lower risk investments.
Kenya’s plan to raise Ksh 995.7 billion from domestic markets in the 2026/27 fiscal year could reshape how commercial banks allocate lending, leaving small businesses more exposed to tighter credit terms even as overall private sector credit grows, according to a market commentary from global brokerage EBC Financial Group
The domestic borrowing target forms the bulk of financing for a Ksh 1.112 trillion fiscal deficit, equivalent to 5.3% of gross domestic product (GDP), under the National Treasury’s budget framework for 2026/27.
Net external borrowing accounts for just Ksh 116.2 billion of the gap, leaving local investors, chiefly banks, to fund the remainder.
Borrowing in shillings shields the government’s balance sheet from exchange rate volatility. But EBC cautions that heavier reliance on domestic capital markets intensifies competition for bank liquidity that could otherwise flow to businesses.
Government paper’s risk-free appeal
EBC’s analysis centres on a structural trade-off facing lenders: government securities offer predictable returns without the due diligence required for business loans.
Commercial banks already held approximately Ksh 2.2 trillion in government securities as of March 2026, about 27% of banking sector assets, according to the World Bank’s July 2026 Kenya Economic Update. With more than a quarter of bank balance sheets already tied up in state paper, absorbing an additional Ksh 995.7 billion in new issuance could squeeze private enterprise funding further.
“Treasury bills and bonds can offer banks a more predictable return without the same level of company checks required for a business loan,” said David Precious, senior market analyst at EBC Financial Group. “That said, banks may offer smaller loans, request more collateral or shorten repayment periods for firms they consider riskier. Smaller businesses could face stricter terms even while total private-sector credit grows.”
Headline credit growth masks uneven access
Kenya’s private sector credit growth rebounded to 8.1% year on year in March 2026, according to the Central Bank of Kenya (CBK), with the regulator’s December 2025 projections pointing to 10.6% growth by December 2026. But EBC argues that expanding totals do not guarantee equal access for smaller borrowers.
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The brokerage points to three factors keeping lenders cautious toward micro, small, and medium enterprises (MSMEs):
Collateral demands remain a persistent barrier. A CBK survey on MSME access to bank credit found that term loans and overdrafts make up more than 85% of MSME lending, a structure that leaves stringent collateral requirements as a central bottleneck for smaller firms.
Asset quality concerns also weigh on lender appetite. Non-performing loan (NPL) levels remain elevated across the sector, keeping banks wary of extending uncollateralised or higher-risk credit.
Capital reserve pressures add a third constraint. Banks are working toward a Ksh 10 billion minimum core capital threshold under the Business Laws (Amendment) Act, 2024. The National Treasury’s 2026/27 budget statement proposed extending the compliance deadline from December 2029 to December 2032 and scrapping the annual interim milestones, giving smaller lenders more breathing room. The Ksh 10 billion target itself remains unchanged, so banks building toward it are still likely to favour government paper or well-collateralised corporate accounts in the meantime.
Ripple effects down the supply chain
EBC warns that selective lending has knock-on effects beyond the banking sector. Manufacturers may delay machinery investments if financing tenors are too short. Distributors may cut inventory purchases when overdraft limits contract. Suppliers and workers further down the chain then face thinner orders as production demand slows.
EBC concludes that the real test for Kenya’s financial health lies beneath the aggregate credit figures: whether growth reaches MSMEs directly, or stays concentrated among large, well-collateralised borrowers.
By Benedict Aoya
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