Commercial banks are becoming increasingly cautious about lending to Kenya’s State corporations, with new data showing a sharp decline in credit to parastatals over the past two years.
According to the Central Bank of Kenya (CBK), net domestic credit to State corporations dropped by 68.1%, falling from Ksh.87.7 billion in March 2024 to Ksh. 28 billion by March 2026. The decline accelerated over the past year alone, with banks cutting their exposure from Ksh.55.7 billion in March 2025.
The slowdown follows a series of government reforms aimed at tightening oversight of public borrowing.
Treasury Cabinet Secretary John Mbadi has directed that State corporations can no longer take out loans, overdrafts or any other form of credit without approval from both the National Treasury and their respective parent ministries. In addition, parastatals that have defaulted on existing loans or accumulated pending bills will not qualify for new Treasury-backed borrowing or government guarantees until they address their outstanding obligations.
The stricter rules come as the government pushes ahead with the Government Owned Enterprises Act, 2025, a law that requires many State corporations to transition into companies governed under the Companies Act. The reforms are intended to improve efficiency, strengthen governance and attract private investment into commercially viable public entities.
For banks, however, the changes have introduced a new layer of caution.
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Legal advisory firm Bowmans has advised lenders to assess each State corporation on its own financial strength rather than relying on the assumption of government support. That means looking closely at an institution’s balance sheet, profitability and cash flow before extending credit.
The firm also warned that the new law does not clearly preserve existing government guarantees or other borrowing arrangements once a State corporation is converted into a company. As a result, banks may need to review existing loan agreements, reassess collateral, seek confirmation from the Treasury on government backing and, where necessary, renegotiate financing terms.
The transition could also uncover previously undisclosed debts, legal disputes or other financial obligations through mandatory audits, adding another layer of uncertainty for lenders.
With no fixed timeline for completing the conversion of State corporations, banks are expected to remain cautious. Until there is greater clarity, questions around loan pricing, risk assessment and future lending to public enterprises are likely to persist.
