Banks caught between Ruto's lending push, rising bad loans

President William Ruto has renewed his criticism of Kenya's cash-rich commercial banks, accusing them of denying millions of small businesses access to affordable credit despite posting record profits. His strongly worded remarks have reignited the long-running standoff between the government and the banking sector.

Speaking during the World MSME Day celebrations in Nairobi, the President challenged lenders to rethink their business models, pointing to the government-backed Hustler Fund as proof that profitable lending is possible at single-digit interest rates.

"The uncomfortable truth remains: The vast majority of micro and small enterprises, the very backbone of our economy, have remained outside that flow of capital," Ruto declared.

Kenya's MSMEs account for 98 per cent of all businesses as they create more than 90 per cent of non-farm jobs and contribute to over 40 per cent of the country's gross domestic product. Yet, the sector faces a staggering financing gap of approximately Sh3 trillion, according to the President.

"How can we possibly grow our economy while locking most of our people off the balance sheet? How do we create jobs for our youth while refusing to bank on them?" Ruto posed to an audience of bankers, entrepreneurs, and diplomats at KICC.

The President's remarks come against a backdrop of heightened tension between the Ruto government and commercial lenders over borrowing costs. While the Central Bank Rate (CBR) has been cut to 8.75 per cent, average commercial bank lending rates stood at 14.5 per cent in May, down from a peak of 17.2 per cent in November 2024. Some banks continue to charge rates exceeding 18 per cent.

Ruto pointed to what he termed as the “success” of the Hustler Fund, which has disbursed close to Sh90 billion to more than 27 million Kenyans at an annual interest rate of 8 per cent, as evidence that banks can profitably lend at lower rates. The fund has also mobilised over Sh6 billion in savings from citizens the banking system had long written off.

"What some dismiss as no opportunity, the visionary recognises as untapped demand. The unbanked are not a risk to be kept at arm's length. They are a market waiting to be served," Ruto said.

The President drew inspiration from Bangladesh's Grameen Bank, founded by Nobel laureate Muhammad Yunus, which has extended more than Sh 4.79 trillion ($37 billion) in collateral-free loans to over 10 million of the world's poorest people.

"One man. One idea. He banked the unbankable. Kenya needs that kind of thinking," Ruto said.

The banking sector, however, is facing its own pressures. Non-performing or bad loans stood at 15.3 per cent of gross loans in May, down from a peak of 17.6 per cent in August 2025, but remain elevated. A recent Central Bank of Kenya (CBK) survey found that 78 per cent of banks plan to intensify credit recovery efforts in the trade sector, while 75 per cent will target personal and household loans.

Banks have also been tightening their lending standards, with many choosing to channel surplus liquidity into government securities and interbank lending rather than riskier retail or corporate borrowers.

Ruto's administration has previously clashed with banks over high lending rates. In 2024, the President and Central Bank Governor Kamau Thugge publicly urged lenders to lower borrowing costs, warning that high loan rates were crippling the economy and hurting low-income consumers.

The standoff comes amid increased regulatory scrutiny on loan pricing. The Central Bank recently proposed stringent new disclosure requirements for mobile lenders and a crackdown on hidden fees across the banking sector.

The CBK's Monetary Policy Committee recently held the CBR steady at 8.75 per cent for a second consecutive meeting, citing inflation risks from Middle East supply disruptions.

Ruto, however, made it clear that government intervention alone cannot close the Sh3 trillion financing gap.

"Government funds can catalyse and prepare our people for credit. But government alone cannot close a Sh3 trillion financing gap. The private sector can," he said.

The President urged lenders to embrace innovation by using behavioural credit scoring, mobile technology, and digital data to expand access to affordable credit for small businesses.

"The institution that learns to reach them through behavioural credit scoring, mobile technology, and the data we already generate will not only transform our economy, but also its future," Ruto said.

He also announced that the government is developing a National Credit Score framework that will recognise repayment behaviour and financial discipline instead of relying solely on traditional forms of collateral.

"Character and behaviour, not just a title deed or a logbook, should unlock financing," he said.

The President's speech signals that the government is prepared to intensify pressure on banks to lend more aggressively to small businesses, even as lenders brace for a tougher second half of the year amid rising defaults and increased recovery efforts.

"If we formalise our enterprises and finance them, we will convert 98 per cent of our businesses from survival into scale. We will turn hustlers into employers, workshops into factories and informal traders into the hidden champions of Africa," Ruto said.

"That is our destination."