Kenyan commercial banks have reduced lending to State corporations by nearly 70% over the past two years, withdrawing Sh59.7 billion as legal changes and stricter Treasury oversight push lenders to reassess the creditworthiness of public enterprises.
Central Bank data shows net domestic credit to parastatals fell to Sh28 billion in March 2026 from Sh87.7 billion in March 2024. The decline sped up in the last year, with outstanding loans nearly halving from Sh55.7 billion in March 2025.
Reforms reshape risk assessment
The shift follows the introduction of the Government Owned Enterprises (GOE) Act, 2025, which converts State corporations into public limited liability companies under the Companies Act. The law removes statutes that once established these entities, aiming to make public assets more commercial and attract private investment.
Additional legislation—the Privatization Act, 2025, National Infrastructure Fund Act, 2026, and Sovereign Wealth Fund law—supports this change. These measures indicate a major overhaul in how public assets are managed and financed, though lenders remain cautious.
Law firm Bowmans cautions that banks can no longer view State-owned enterprises as quasi-sovereign borrowers. Lenders must now evaluate each entity based on its own financial health rather than relying on implicit government backing.
“The GOE Act does not address government guarantees, letters of support, or letters of comfort,” the firm’s lawyers stated in a May note. “Lenders should not assume continued sovereign support and must reassess credit risk on a standalone basis.”
The uncertainty comes from how guarantees and support arrangements will transfer to successor companies. While these firms inherit assets, liabilities, and contracts, the GOE Act does not explicitly preserve guarantees tied to the original legal entities. This gap may force banks to renegotiate terms, adjust risk weights, or pause new lending until clarity emerges.
Bowmans also highlights potential hidden risks. Mandatory audits before asset transfers could uncover undisclosed debts or contingent liabilities that weaken an enterprise’s financial position. The firm advises lenders to review their loan books and seek written confirmation from the National Treasury on whether government backing will continue after conversion.
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Treasury has tightened control over State corporation borrowing. Cabinet Secretary John Mbadi has banned these entities from securing loans or credit without prior approval. The directive also blocks new guarantees for corporations with defaults or unpaid bills, further restricting access to commercial credit.
The GOE Act sets no deadline for completing conversions, leaving lenders and investors uncertain. For banks, the challenge is not just whether to lend but how to price risk in a system where old assumptions no longer apply.
The era of treating State corporations as low-risk borrowers has ended. What comes next remains unclear.
Bowmans points out that financing agreements tied to statutory borrowing powers may need renegotiation. Without explicit provisions, lenders could face unsecured debt against entities with weakened balance sheets.
Treasury’s new controls create a bottleneck. While oversight is now centralized, the rules may cut off funding before struggling corporations stabilize.
The change reflects a global trend where governments avoid backing State-owned enterprises. In Kenya, this transition is happening quickly. The outcome depends on whether the reforms improve efficiency or leave a funding gap neither banks nor the private sector can fill.
Lending to parastatals has dropped sharply. The future hinges on how quickly the new rules take effect and whether the entities can adapt.
Some corporations may need smart rules to handle the shift successfully.
