How The Government Of Kenya Has Become The Predator, That’s Mauling SMEs Out Of The Lending Space

In a functioning economy, governments play the role of enablers — laying the groundwork for growth, supporting innovation, and empowering the private sector to thrive. But in Kenya today, the very engine that should be driving progress is instead suffocating it. Under President William Ruto’s administration, the relentless borrowing from local commercial banks has created a credit famine for small and medium-sized enterprises (SMEs) and the private sector at large. This is not just bad economics — it is policy-induced economic suicide.

The figures are damning. In the last four years, local banks have redirected their lending muscles to one dominant customer: the government. While this may appear innocuous on paper — even prudent from a banking perspective — the implications are disastrous. In the period between 2021 and 2024, government borrowing from local banks has ballooned, pushing past Ksh 1.3 trillion. In contrast, lending to the private sector, especially SMEs, has been steadily declining. The math tells a story of systemic exclusion.

Banks find lending to the government a safe, risk-free, and highly profitable venture. Treasury bills and bonds offer assured returns, no risk of default, and no messy court battles. But this appetite for state paper has consequences. It crowds out private investment, tightens liquidity, and raises the cost of capital for businesses that create jobs.

Kenya’s SMEs are the lifeblood of the economy. They generate over 80% of the country’s employment and contribute significantly to GDP. Yet, these enterprises are being strangled by a policy environment that rewards laziness in financial markets. Why conduct due diligence, why understand sector-specific risk, and why innovate with financial products when you can lend to the state and collect returns like clockwork?

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This lazy banking model is profitable but immoral. The very institutions that market themselves as partners in development are complicit in the collapse of Kenya’s productive sector. As SMEs are starved of credit, they default on obligations. Non-performing loans spike. Banks, seeking to recover their money, auction properties. The result is a cascade of business closures, job losses, and rising poverty.

And yet, the government — itself a player and referee in the financial ecosystem — continues to borrow locally, draining the oxygen out of the economy. This is a textbook case of crowding out: when government borrowing drives up interest rates and limits the amount of money available for the private sector. It is also a moral crisis.

One can understand a government borrowing in a crisis — to cushion against a pandemic, to rebuild after a natural disaster. But what we are witnessing is not emergency spending. It is structurally dependent on domestic debt to fund bloated recurrent expenditures and political patronage. It is state gluttony masquerading as fiscal policy.

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This cannot continue.

Already, the effects are visible. The business environment is deteriorating. Unemployment is rising. Gender-based violence is on the uptick — a social consequence of economic despair. Non-performing loans are ballooning, reaching over Ksh 550 billion. The auction pages of local dailies grow thicker each week, chronicling the death of enterprise.

And still, the government borrows.

The question is no longer whether this model is unsustainable — it is whether we are willing to acknowledge the collapse and act. Parliament must step in. There is an urgent need for legislative reform that caps the amount of domestic borrowing by the state. Let government borrow responsibly — and from international concessional lenders where possible — but stop bleeding the very heart of the economy.

Additionally, we must compel financial institutions to fulfill their developmental role. Parliament must pass a law that sets minimum thresholds for quarterly lending to SMEs and the broader private sector. Just as the Central Bank sets reserve requirements, it must now set private credit quotas. This is the only way to reverse the trend.

Some will argue that government borrowing is necessary to finance development projects. But this argument crumbles upon scrutiny. How many of these projects are real? How many are ghost roads, white elephants, or overinflated consultancies? If government borrowing was truly driving productivity, then jobs, incomes, and exports would be rising. They are not.

What’s more galling is that this aggressive borrowing is happening in a policy vacuum. There is no parliamentary oversight, no clear borrowing ceilings, and no penalties for breaching sustainability thresholds. The fiscal responsibility framework has collapsed. In its place is political expediency.

And banks? They are not innocent bystanders. Their profit margins have soared, but at what cost? A society where banks thrive while businesses die is not a stable society. It is a ticking time bomb. We are walking into the 2025–2030 decade with a structurally flawed financial ecosystem.

One cannot talk about development when over 2,000 businesses are being auctioned monthly. When entrepreneurs are liquidating stock to service bank loans. When innovation stalls because risk capital is extinct. When financial inclusion becomes a buzzword instead of a lived experience.

Let us not be fooled by greenwashed rhetoric, either. When banks claim to have set aside Ksh 100 billion for “green financing,” the question must be asked: How much of it has been disbursed? How many farmers, clean energy startups, or water harvesting innovators have received a single shilling? The numbers betray the lies.

The Kenyan economy is on a ventilator, and the government is stepping on the oxygen pipe.

Real recovery must begin with credit justice. Let us redistribute risk in the financial sector. Let us punish inertia and reward innovation. Let us legislate for fairness in capital allocation.

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What does such a legislative framework look like?

First, introduce a domestic debt ceiling — a percentage cap of GDP beyond which no further borrowing from local banks can occur. Second, require commercial banks to allocate at least 30% of their annual loan book to SMEs and emerging businesses, enforced with quarterly audits and penalties for non-compliance.

Third, create a National Credit Access Authority that audits not just availability, but accessibility of credit. What good is a fund that no one qualifies for?

Fourth, encourage credit guarantee schemes and interest rate subsidies for SMEs — with government underwriting some of the risk, just as it does for large contractors in infrastructure.

Finally, embed this framework into the constitution so that it cannot be reversed by political whims.

The time for action is now.

Between 2021 and 2024, lending to SMEs dropped from Ksh 600 billion to below Ksh 500 billion. Government borrowing grew by more than 60% in the same period. Non-performing loans have reached a record Ksh 550 billion. Auctions have tripled.

These numbers tell a story — a story of a state that has abandoned its productive class. A story of institutions that would rather lend to power than to potential. A story that must end.

We have two choices: either continue down this road of concentrated credit and systemic exclusion or choose a new path of reform, inclusion, and responsible borrowing.

The stakes are existential. Because when the state becomes the predator, there are no survivors — not even the banks.

We need bold legislation. We need moral courage. And we need it now.

Let the next parliament be remembered for breaking the cartel of fiscal gluttony and for giving Kenya’s SMEs — the country’s true job creators — a fighting chance.

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