For many Kenyan small business owners, access to credit already feels out of reach as rising government debt pushes banks to delay loans and charge high interest rates. They demand strict collateral. The situation is set to worsen as the government plans to borrow about Sh1 trillion from the local market in the 2026/27 financial year. The government aims to use this domestic borrowing to plug a Sh1.11 trillion budget deficit, but the move carries serious consequences for the private sector. Banks and other lenders actively choose to lend to the government. Treasury bills and bonds guarantee repayment and deliver steady returns. In contrast, lenders view small businesses as risky, especially during tough economic times.
Data confirms this shift. The Parliamentary Budget Office shows that growth in total credit to the economy fell from 8.1 per cent in March 2024 to 5.7 per cent in March 2025. During the same period, lending to Micro, Small and Medium-sized Enterprises (MSMEs) collapsed. Credit to MSMEs fell sharply from 7.9 per cent to just 0.2 per cent, while lending to the government doubled from 8.6 per cent to 16.4 per cent. This shift goes beyond a technical change in banking behaviour. Government borrowing directly squeezes the lifeblood of businesses that rely on loans to survive, expand, and hire workers.
MSMEs Carry the Economy, Yet Feel the Pressure First
MSMEs sit at the centre of Kenya’s economy. About 7.4 million small and medium-sized enterprises operate across the country. Together, they employ between 80 and 90 per cent of the labour force, translating to roughly 15 million jobs out of an estimated 18 to 20 million workers nationwide. These enterprises also drive national output. MSMEs contribute over 40 per cent of Kenya’s Gross Domestic Product (GDP). The 2025 Economic Survey shows that the sector employed 17.4 million people in 2024, up from 14 million in 2020. Small businesses absorb labour when the formal sector fails to keep pace with population growth. Despite their importance, MSMEs feel credit pressure first. When banks redirect funds to government securities, small businesses lose access to working capital. Entrepreneurs shelve expansion plans. Firms delay equipment upgrades. Employers freeze hiring or cut staff.
The Parliamentary Budget Office warns that this pattern reflects a classic crowding-out effect. Increased government borrowing from the domestic market restricts private sector access to finance. In simple terms, government demand for loans pushes businesses to the back of the queue. These pressures come at a time when economic conditions remain tight. Inflation continues to raise operating costs. Consumer spending remains weak. Energy, rent, and transport costs strain cash flows. Without affordable credit, many businesses struggle to survive, and closures become more likely.
Rising Debt, Fiscal Gaps, and Sustainability Concerns
The government plans to borrow Sh1.01 trillion locally in 2026/27, alongside external borrowing of Sh99.5 billion, equivalent to about 0.5 per cent of GDP. Domestic borrowing alone will account for 4.8 per cent of GDP. Together, these sources will finance a projected fiscal deficit of Sh1.11 trillion, as outlined in the draft 2026 Budget Policy Statement. Kenya’s public debt already stands at about Sh12.1 trillion, representing a debt to GDP ratio of 69 per cent. This level far exceeds the International Monetary Fund’s recommended 50 per cent threshold for developing countries. In 2023, the government replaced the fixed Sh10 trillion debt ceiling with a debt anchor of 55 per cent of GDP, but current debt levels remain well above that target. A Central Bank of Kenya (CBK) report presented to Parliament shows that the Kenya Kwanza administration has borrowed at least Sh3 trillion in its first three years. When President William Ruto assumed office in the 2021/22 financial year, public debt stood at Sh8.7 trillion.
The CBK report, however, did not clearly identify the projects financed by the Sh3 trillion borrowed during this period. The Controller of Budget, Dr Margaret Nyakang’o, has raised similar concerns. In her budget implementation review for July, August, and September of the 2025/26 financial year, she disclosed that the government spent Sh507.98 billion on debt repayment in just three months. By then, public debt had reached Sh12.04 trillion. Looking ahead, the Treasury plans to spend Sh4.7 trillion in the 2026/27 financial year. Of this amount, Sh3.43 trillion will go to recurrent expenditure, equal to 16.4 per cent of GDP, while Sh759.1 billion will fund development projects, about 3.6 per cent of GDP. Transfers to county governments will total Sh446.6 billion, with Sh5 billion allocated to the Contingency Fund.
A Timeless Warning for Economic Policy
Kenya’s borrowing path offers a lesson that extends beyond one budget cycle. Heavy domestic borrowing may seem convenient, but it steadily weakens the private sector. MSMEs, which create most jobs and drive growth, struggle to access credit. Over time, this weakens innovation, employment, and economic resilience. Borrowing itself does not threaten the economy. Excessive borrowing does. Poorly targeted borrowing does. Borrowing without clear returns does. Sustainable growth requires balance. Governments must meet public financing needs without starving businesses of credit. When that balance tips too far toward government borrowing, small businesses feel the impact first. Eventually, the entire economy pays the price.
