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.

Read Also: As Long As the Kenyan Government Competes With SMEs For Credit, They Will Always Lose

This cannot continue.