Banks Brace For Risk-Based Lending As NCBA’s Muathi Kilonzo Outlines Sector Outlook

Kenya’s banking industry is undergoing a period of notable transformation, marked by the implementation of a risk-based credit pricing framework against the backdrop of moderating inflation and persistently high interest rates.

Speaking on these developments to CNBC Africa, NCBA Investment Bank Managing Director Muathi Kilonzo outlined how financial institutions are recalibrating their strategies while also identifying new growth prospects in capital markets and investment management.

As of July 2025, the Central Bank of Kenya’s (CBK) benchmark lending rate stood at 15.24 percent, keeping borrowing costs elevated. With private sector credit expansion remaining subdued, Kilonzo noted that commercial banks are cautiously restructuring their loan portfolios. He observed that CBK’s policy measures are beginning to stimulate activity, particularly in the Treasury bill market, which is often viewed as a leading indicator of investor sentiment.

“CBK’s efforts to reduce the policy rate are encouraging private sector credit growth. We are already witnessing positive movement in the Treasury bill market,” said Kilonzo. “The 91-day T-bill has dropped to approximately 8 percent, down from double digits just months ago. This is drawing investor interest even though lending volumes remain constrained.”

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Kilonzo further highlighted a fundamental shift within Kenya’s investment landscape, particularly at the Nairobi Securities Exchange (NSE). Once dominated by foreign investors, the NSE is now increasingly driven by local participants, a trend that is reshaping market dynamics.

“The Nairobi Securities Exchange, previously reliant on foreign activity, is now supported by local investors,” Kilonzo stated. “This has strengthened our brokerage operations, while our unit trust and wealth management businesses are recording significant growth as Kenyans pursue diverse investment opportunities.”

This transition underscores the growing appetite for wealth management and diversified investment solutions among both retail and institutional investors. NCBA Investment Bank is positioning itself to play a central role in this evolution, offering innovative products, customized advisory services, and contributing to market development.

Despite economic headwinds, several industries continue to demonstrate resilience. Tourism, buoyed by a strong post-pandemic rebound, remains a bright spot, while Kenya’s coffee sector is benefiting from increased global demand. However, manufacturing continues to face challenges, largely due to structural inefficiencies and rising production costs.

“The difficulties in manufacturing are consistent with long-standing competitiveness and infrastructure issues,” Kilonzo noted.

On the transition to risk-based lending, Kilonzo emphasized that the framework is both timely and beneficial. The model allows banks to determine loan pricing based on individual borrower risk profiles, aligning Kenya with international best practices.

“This model is aligned with global standards,” he remarked. “While it will take some months for the sector to fully adjust, the clarity it provides in loan pricing is a positive development for the broader economy.”

For borrowers, the framework implies that those with stronger credit histories may access more favorable rates, while higher-risk clients may face steeper costs. For lenders, it provides greater flexibility in managing credit risks.

The sector continues to grapple with elevated non-performing loans (NPLs), which remain at about 14 percent. Nonetheless, Kilonzo expressed optimism that improvements in GDP growth, export revenues, and tourism recovery would gradually ease the pressure.

Concerns over Kenya’s external debt, particularly Eurobond obligations, have also lessened. According to Kilonzo, improved foreign exchange reserves, a recent S&P credit rating upgrade, and currency stability have bolstered investor confidence.

Looking ahead, Kilonzo underscored the critical role of household spending in stimulating credit demand. With inflation moderating and macroeconomic stability improving, banks anticipate renewed consumer and business confidence.

“As purchasing power strengthens, banks will see increased lending activity,” he affirmed.

In the interim, NCBA and other financial institutions are focusing on innovation in wealth management, advisory, and digital banking to meet evolving client needs. While the transition to risk-based lending requires adjustment, industry leaders are confident that it will promote a more resilient, transparent, and sustainable financial system.

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