Banks are now worried that the continued increase in fuel prices and the cost of living could translate into higher loan defaults.
The lenders expect private sector credit growth to reach 9.9 per cent this year, driven by lower lending rates, digital lending, expansion of loan books and improved activity in key sectors.
But behind the optimism is a growing concern that the same consumers and businesses banks are counting on to drive loan growth are running out of financial breathing room.
The lenders say sustained economic strain, if not checked early, could undermine the recovery in private sector lending by weakening household purchasing power and squeezing the businesses that borrowers depend on to repay loans.
The Central Bank of Kenya’s latest Market Perceptions Survey shows that the recovery in lending remains vulnerable to deteriorating consumer spending and rising operating costs, creating a potential double blow for banks.
Businesses facing higher fuel, logistics and input costs could see sales and profitability decline, while households struggling with the rising cost of living may have less disposable income to spend and service existing loans.
“On the downside, 71 per cent of respondents identified high inflation and reduced consumer spending as key factors likely to dampen demand for goods and services, and constrain overall economic activity,” said Central Bank of Kenya Governor Kamau Thugge in the report.
The survey, covering commercial banks, microfinance banks and private sector firms, found that 64.5 per cent of respondents cited elevated fuel and energy prices as a threat to economic activity, while half pointed to risks arising from geopolitical tensions.
The conflict in the Middle East has emerged as a particular concern, with respondents warning that it has affected Kenya through higher fuel and energy costs, supply chain disruptions and weaker investor sentiment.
For banks, the concern goes beyond the immediate impact of inflation on consumers. Higher prices could weaken the entire credit chain.
Households facing rising food, fuel and transport costs may cut back on discretionary spending, reducing revenues for retailers, manufacturers, transport companies and other businesses. Those businesses, in turn, could face difficulties meeting their financial obligations and may scale back expansion plans or borrowing.
The survey notes that businesses are already seeking financing for working capital and expansion as rising fuel prices and global disruptions push up production, logistics and input costs.
“Respondents also reported increased demand for credit from businesses seeking financing for working capital and expansion, amid rising production, logistics and input costs, largely driven by elevated fuel prices and global disruptions,” the report says.
But the CBK survey warns that this demand could weaken if inflation further erodes household purchasing power.
Banks indicated that while declining lending rates, partly supported by monetary policy easing and the adoption of the Kenya Shilling Overnight Interbank Average, had improved loan affordability and encouraged credit uptake, the gains could be constrained by elevated fuel inflation and reduced household purchasing power.
Banks project private sector credit growth of 9.9 per cent in 2026, up from expectations of 9.6 per cent in May, although still below the 11.7 per cent forecast at the beginning of the year.
Large banks expect credit growth of 10.5 per cent, medium-sized lenders 7.3 per cent and small banks 9.3 per cent.
The expected expansion is being driven by strategic loan book growth, digital financial innovation, customer-level risk-based pricing and lower interest rates.
Targeted financing of small and medium-sized enterprises is also supporting the outlook, with 37 per cent of bank respondents citing MSME financing strategies and digital lending channels as factors supporting credit growth and access to finance.
About 90 per cent of respondents identified higher fuel and energy prices as the primary drivers of inflation over the next three months, saying increased fuel costs are pushing up transport, electricity, production and distribution expenses.
Food prices, poor harvests and distribution challenges are adding to the pressure, while rising business operating costs and the elevated cost of living are expected to sustain inflationary pressures
