Commercial banks have cut lending to State corporations by more than two-thirds, or Sh59.7 billion in two years as legal reforms and tighter National Treasury controls prompt lenders to reassess the creditworthiness of public enterprises.
Central Bank of Kenya (CBK) data show net domestic credit to parastatals fell to Sh28 billion in March 2026 from Sh87.7 billion in March 2024, a decline of 68.1 percent.
Banks almost halved their exposure over the past year alone, reducing outstanding loans from Sh55.7 billion in March 2025 to Sh28 billion in March this year.
The retreat coincides with the implementation of the Government Owned Enterprises (GOE) Act, 2025, which is reshaping State corporations into public limited liability companies and changing how lenders assess their credit risk.
The law repeals many statutes that established State corporations and requires the entities to become companies under the Companies Act, part of reforms aimed at commercialising public assets and attracting private investment.
The changes complement the Privatization Act, 2025, the National Infrastructure Fund Act, 2026, and the recently-enacted Sovereign Wealth Fund law, signalling a shift in the management and financing of public assets.
Law firm Bowmans says lenders should stop treating State-owned enterprises as quasi-sovereign borrowers just because they are government-owned.
Instead, banks should assess each enterprise on the strength of its own balance sheet, profitability and cash flows rather than assumptions of implicit government backing.
Bowmans lawyers Aleem Tharani, Dominic Indokhomi, Edwin Baru, Nairuko Kantai and Qabale Guyo say the GOE Act leaves crucial questions unanswered over existing government guarantees and support arrangements.
“The GOE Act is entirely silent on the treatment of government guarantees, letters of support and letters of comfort. Lenders should not assume continued sovereign support and should reassess GOE credit risk on a standalone basis,” they wrote in a note in May.
They added that guarantees issued to statutory corporations may not automatically transfer to successor companies, depending on how the agreements were drafted.
Although successor companies inherit assets, liabilities and contractual obligations, the GOE law does not expressly preserve guarantees or comfort letters tied to the previous legal entities.
The uncertainty could affect how banks price loans, assign risk weights and determine future lending to State-owned enterprises undergoing conversion.
Bowmans also warns that financing agreements linked to statutory borrowing powers may require renegotiation, waivers or legal confirmations to remain enforceable after the restructuring.
The firm says mandatory audits before assets and liabilities are transferred could uncover previously undisclosed debts, litigation or contingent liabilities that materially weaken the financial position of affected enterprises.
The GOE Act sets no deadline for completing the conversion process, potentially prolonging uncertainty for lenders, investors and the corporations themselves.
Bowmans advises lenders to review loan books, security arrangements, guarantees and other exposures linked to State-owned enterprises.
Where lending decisions relied on government support, the firm recommends obtaining written confirmation from the National Treasury on whether such backing will continue after conversion.
The decline in bank lending also coincides with tighter Treasury controls over borrowing by State corporations.
Treasury Cabinet Secretary John Mbadi has directed State corporations not to obtain loans, overdrafts or any other credit facilities without prior approval from the Treasury and their parent ministries.
He also barred the Treasury from approving new borrowing or issuing guarantees for State corporations that have defaulted on loans or accumulated pending bills, limiting access to fresh commercial credit for distressed entities.
