Kenya’s plan to raise KSh 995.7 billion from the domestic market in the 2026/27 fiscal year could influence how banks balance lending to businesses against investing in government securities, according to EBC Financial Group.

The National Treasury’s FY2026/27 Budget Summary projects a fiscal deficit of KSh 1.112 trillion, equivalent to 5.3% of GDP, with net external financing expected to contribute only KSh 116.2 billion. As a result, domestic investors are expected to finance the majority of the funding gap.

Borrowing in local currency reduces exchange-rate risk because repayments are denominated in Kenyan shillings rather than foreign currencies. However, EBC said increased issuance of Treasury bills and bonds could encourage banks to allocate more capital to government debt instead of extending loans to businesses.

“Treasury bills and bonds can offer banks a more predictable return without the same level of company checks required for a business loan,” said David Precious, Senior Market Analyst at EBC Financial Group.

“That said, banks may offer smaller loans, request more collateral or shorten repayment periods for firms they consider riskier. Smaller businesses could face stricter terms even while total private-sector credit grows.”

The potential shift comes as Kenyan banks already have significant exposure to government debt.

According to the World Bank’s July 2026 Kenya Economic Update, commercial banks held approximately KSh 2.2 trillion in government securities in March 2026, representing around 27% of banking sector assets.

With more than a quarter of bank assets already invested in government securities, EBC noted that further domestic borrowing could intensify competition for available capital. The World Bank has warned that heavier domestic borrowing may crowd out private-sector credit, weighing on investment and economic demand.

Government securities typically provide predictable returns without the extensive credit assessments required for commercial lending, making them an attractive option for banks. As a result, lenders may increasingly prioritize stronger corporate borrowers while tightening lending standards for smaller businesses.

For many small and medium-sized enterprises (SMEs), this could translate into reduced overdraft facilities, smaller loan sizes, shorter repayment periods, or higher collateral requirements.

The Central Bank of Kenya’s 2024 Survey Report on MSME Access to Bank Credit found that term loans and overdrafts account for more than 85% of MSME lending, while collateral requirements remain one of the biggest barriers to accessing formal finance.

The report also found that micro-enterprises generally receive shorter loan tenors because they are viewed as higher-risk borrowers.

EBC noted that these tighter lending conditions could have wider economic implications.

Manufacturers may delay equipment purchases if financing becomes more restrictive, while distributors could reduce inventory if overdraft facilities are cut back, potentially slowing production, supplier activity and job creation.

Despite these concerns, private-sector credit has been recovering.

The Central Bank of Kenya’s April 2026 Monetary Policy Committee reported annual private-sector credit growth of 8.1% in March, compared with negative growth in early 2025, while average lending rates declined to 14.7%.

The central bank’s December 2025 Monetary Policy Statement projects credit growth of 10.6% by the end of 2026, supported by lower borrowing costs.

However, EBC cautioned that headline credit growth may not reflect how funding is distributed across the economy. Lending could remain concentrated among larger companies with stronger balance sheets and higher-quality collateral, leaving smaller businesses with limited access to financing despite overall market expansion.

Banks also continue to contend with elevated credit risks.

According to the World Bank, gross non-performing loans accounted for 15.6% of total loans in March 2026, down from 17.4% a year earlier but still representing a key vulnerability for the banking sector.

High levels of impaired loans may encourage lenders to strengthen underwriting standards, increase collateral requirements and prioritize borrowers with established repayment records.

At the same time, banks are preparing for higher capital requirements.

While the Banking Act currently requires minimum core capital to increase from KSh 1 billion to KSh 10 billion by the end of 2029, the FY2026/27 National Treasury Budget Statement proposes extending the deadline to December 2032 and removing interim annual milestones.

The extension would provide smaller lenders with additional time to raise capital, retain earnings or pursue mergers, but EBC said the higher capital threshold remains in place and could continue to influence lending decisions.

According to the firm, banks seeking to strengthen capital positions may favor investments in government securities or larger, well-collateralized borrowers over higher-risk SME lending.

While government borrowing and private-sector lending can grow simultaneously, EBC said the key question is whether smaller businesses continue to receive adequate access to credit.

“The clearest signal sits beneath the headline numbers,” Precious said.

“If private-sector credit expands while MSME lending lags, the crowding-out concern may have moved from risk to reality,” he said.