By Our Staff Writer<\/em><\/p>\n\n\n\n A Kenyan bank has a choice to make. It can lend to a manufacturer seeking money for a new production line, or it can buy a Treasury bond and lend to the government instead. One requires due diligence. The other comes with a sovereign signature.<\/p>\n\n\n\n That choice, repeated across the financial system, is becoming one of the defining economic questions in Kenya.<\/p>\n\n\n\n Public debt is usually discussed in the language of solvency: how much is owed, when it must be repaid and whether the Treasury can meet its obligations. For businesses, the more immediate question is simpler. What does the government\u2019s appetite for borrowing leave for everyone else?<\/p>\n\n\n\n The answer is increasingly uncomfortable.<\/p>\n\n\n\n Kenya remains at high risk of debt distress, according to the latest debt assessments. The National Treasury’s own figures show total debt service rising to KSh2.34trn in the 2026\/27 financial year, including KSh1.14trn in interest payments.<\/p>\n\n\n\n Interest alone is becoming a formidable fiscal claimant. Domestic interest payments are projected at KSh879.4bn in 2026\/27, equivalent to 27.7% of projected revenue. External interest adds another KSh263.1bn.<\/p>\n\n\n\n The government is not merely borrowing to build. It is borrowing to service borrowing.<\/p>\n\n\n\n And that is where the problem becomes a business problem.<\/p>\n\n\n\n Kenya’s domestic capital market has become an increasingly important source of government finance. The attraction is obvious. Government securities offer banks and institutional investors a relatively liquid asset with a known return.<\/p>\n\n\n\n Private borrowers are a different proposition.<\/p>\n\n\n\n A manufacturer can default. A developer can run out of cash. A young technology company can fail spectacularly. The Treasury, by comparison, has taxation powers and the ability to borrow again. Banks know the difference.<\/p>\n\n\n\n Commercial banks held 47.8% of Kenya’s domestic public debt at the end of 2025, according to an analysis by Cytonn.<\/p>\n\n\n\n The Parliamentary Budget Office has been blunter. Its analysis found that private-sector credit remained constrained by “persistent crowding-out pressures”, with attractive Treasury-bill yields encouraging banks to favour government securities over private lending.<\/p>\n\n\n\n That is not a theoretical problem.<\/p>\n\n\n\n It is the price of money.<\/p>\n\n\n\n When the state competes aggressively for domestic savings, a private company must either pay more to borrow or do without the money. Both outcomes reduce investment. The first damages margins; the second damages expansion.<\/p>\n\n\n\n The World Bank has reached much the same conclusion. Its latest Kenya Economic Update says sustained government borrowing from domestic sources has continued to limit private-sector access to credit.<\/p>\n\n\n\n The point is not that every shilling borrowed by the government displaces a shilling that would otherwise have gone to a business. Financial markets are less mechanical than that. But the direction of pressure is difficult to ignore.<\/p>\n\n\n\n The state is a very large customer in a relatively small financial market.<\/p>\n\n\n\n There is an irony here.<\/p>\n\n\n\n Kenya has spent the past year cutting interest rates partly to revive private-sector credit. The Central Bank Rate is now 8.75%, after several reductions from the much higher levels of 2024 and early 2025.<\/p>\n\n\n\n Government borrowing costs have fallen too. The 91-day Treasury-bill rate was 7.7% in January 2026, down from 9.6% a year earlier, while the average commercial-bank lending rate fell to 14.9% from 17.2%.<\/p>\n\n\n\n This should be good news for companies.<\/p>\n\n\n\n Yet monetary easing and fiscal borrowing can pull in opposite directions. The central bank can make money cheaper at the short end of the market; the Treasury can simultaneously increase its demand for that money.<\/p>\n\n\n\n Kamau Thugge, the central-bank governor, has acknowledged that the transmission of monetary policy into private credit is not yet straightforward. Speaking in June about the new risk-based credit-pricing framework, he said: “it is difficult to tell what impact that framework would have had on credit to the private sector.”<\/p>\n\n\n\n That uncertainty matters.<\/p>\n\n\n\n A lower policy rate is useful only if it eventually reaches the borrower. If banks remain more comfortable holding government paper than financing private investment, the monetary transmission mechanism becomes rather less impressive on the factory floor.<\/p>\n\n\n\n The second business effect is less visible.<\/p>\n\n\n\n Every shilling devoted to debt service is a shilling unavailable for something else. The choice is not always between debt repayment and a new road; it may be between debt repayment and maintaining an existing one.<\/p>\n\n\n\n But the opportunity cost remains.<\/p>\n\n\n\n Kenya’s domestic debt service alone amounted to KSh1.09trn in 2024\/25, according to the Public Debt Management Office. Treasury-bond interest accounted for KSh847.3bn of that amount.<\/p>\n\n\n\n This creates a fiscal trap.<\/p>\n\n\n\n When revenue disappoints, the government borrows. When borrowing rises, debt service rises. When debt service rises, the government has less room for productive expenditure. When productive expenditure weakens, economic growth and tax revenue can suffer. The Treasury then borrows again.<\/p>\n\n\n\n The wheel turns.<\/p>\n\n\n\n The World Bank’s latest assessment is particularly revealing. Kenya’s debt-financed growth model, it argues, has increasingly constrained the private sector and contributed to weak investment and job creation. Its analysis says the country needs to raise private-sector credit relative to GDP from about 25% towards the lower-middle-income-country average of 46%.<\/p>\n\n\n\n That gap is enormous.<\/p>\n\n\n\n It also explains why the quality of fiscal consolidation matters as much as its speed. Cutting productive investment to make the spreadsheet look healthier would be a false economy. So would raising taxes so aggressively that companies stop investing.<\/p>\n\n\n\n Kenya needs the state to borrow less and<\/strong> spend better.<\/p>\n\n\n\n Neither is particularly easy.<\/p>\n\n\n\n The criticism is no longer confined to economists.<\/p>\n\n\n\n In June, lawyer Willis Otieno described the problem in unusually stark terms, arguing that Kenya’s stagnation was the consequence of the state taking too much liquidity from the domestic economy.<\/p>\n\n\n\n “Kenya\u2019s economic stagnation is not primarily a consequence of insufficient capital,” he said. “It is the result of a state that continuously extracts liquidity from the domestic economy.”<\/p>\n\n\n\n The language is polemical. The underlying concern is not.<\/p>\n\n\n\n Kenya’s private sector needs capital to expand, import machinery, finance inventories and take risks. Government also needs capital, and unlike a private borrower it can compel revenue through taxation.<\/p>\n\n\n\n The two are therefore not natural equals in a credit market.<\/p>\n\n\n\n The Controller of Budget has made the point in more bureaucratic language. Increased reliance on domestic borrowing, Margaret Nyakang’o warned, introduces “crowding out private sector credit, upward pressure on interest rates, and potential dampening of economic growth”.<\/p>\n\n\n\n That is the entire problem in one sentence.<\/p>\n\n\n\n The government is not unaware of it.<\/p>\n\n\n\n Kenya’s new debt strategy seeks to reduce the cost and risk of borrowing, extend maturities and make greater use of concessional finance. The strategy also recognises that tighter fiscal space and increased financing needs remain major risks.<\/p>\n\n\n\n Now Nairobi is looking further afield.<\/p>\n\n\n\n The government plans to explore a $300m panda bond in China, an $815m Eurobond and more than $500m in Japanese-market borrowing during the current financial year. It also intends to retire at least $500m of expensive external debt, according to the Treasury’s latest borrowing plan.<\/p>\n\n\n\n That is financial engineering, not fiscal reform.<\/p>\n\n\n\n It may improve the maturity structure or lower the cost of particular liabilities. But swapping one creditor for another does not make the underlying deficit disappear.<\/p>\n\n\n\n The difficult work remains domestic: raising revenue without suffocating investment, restraining recurrent spending, improving the efficiency of public expenditure and creating enough confidence for private capital to take over more of the investment burden.<\/p>\n\n\n\n Politicians will dislike all four.<\/p>\n\n\n\n Kenya is not on the edge of an immediate sovereign default. Indeed, some of the numbers are improving. Treasury-bill yields have fallen sharply and the shilling has stabilised. Investor demand for government securities remains strong.<\/p>\n\n\n\n That is precisely why the danger is easy to underestimate.<\/p>\n\n\n\n A debt crisis does not have to arrive with a bang. It can arrive as a decade of mediocre investment.<\/p>\n\n\n\n The World Bank’s recent assessment is telling. Kenya’s economy grew by an average of about 4.5% a year between 2001 and 2025, yet the growth model has not generated enough formal, productive jobs. About 800,000 people enter the labour market each year, while fewer than 100,000 secure formal employment.<\/p>\n\n\n\n For a country with Kenya’s ambitions, that is a more serious warning than a quarterly fluctuation in GDP.<\/p>\n\n\n\n Businesses need roads, electricity, credit and predictable taxes. They also need banks willing to take a risk on them.<\/p>\n\n\n\n Government borrowing touches all five.<\/p>\n\n\n\n The question, then, is not whether Kenya can continue borrowing. It probably can, for some time.<\/p>\n\n\n\n The question is whether it can borrow without making private investment too expensive, public investment too scarce and economic growth too slow.<\/p>\n\n\n\n That is the debt problem businesses should be watching.<\/p>\n\n\n\n Not the size of the number.<\/p>\n\n\n\n The opportunity cost.<\/p>\n","protected":false},"excerpt":{"rendered":" The cost of borrowing By Our Staff Writer A Kenyan bank has a choice to make. It can lend to a manufacturer seeking money for a new production […]<\/p>\n","protected":false},"author":1,"featured_media":5461,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":""},"categories":[287],"tags":[],"ledger_sector":[],"class_list":["post-5459","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-policy-pulse"],"_links":{"self":[{"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/posts\/5459","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5459"}],"version-history":[{"count":1,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/posts\/5459\/revisions"}],"predecessor-version":[{"id":5462,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/posts\/5459\/revisions\/5462"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=\/wp\/v2\/media\/5461"}],"wp:attachment":[{"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5459"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5459"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5459"},{"taxonomy":"ledger_sector","embeddable":true,"href":"https:\/\/theledgerafrica.media\/index.php?rest_route=%2Fwp%2Fv2%2Fledger_sector&post=5459"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}The bank that buys the Treasury bond<\/h2>\n\n\n\n
The interest-rate paradox<\/h2>\n\n\n\n
Debt service eats the investment budget<\/h2>\n\n\n\n
The private sector is already complaining<\/h2>\n\n\n\n
The Treasury is trying to escape the trap<\/h2>\n\n\n\n
The real danger is stagnation<\/h2>\n\n\n\n