Local borrowing: How Treasury is edging out 'mama mboga'

Kenya's Treasury Department has quietly engineered a financial squeeze that threatens to upend the investment landscape across East Africa. As the government intensifies domestic borrowing to finance budget deficits and service its ballooning external debt, commercial banks are systematically redirecting capital toward government securities—leaving small businesses, traders, and households competing for scraps in an increasingly depleted credit market.

The mechanism is straightforward but devastating. Government bonds and Treasury bills offer banks risk-free returns guaranteed by sovereign backing, coupled with favorable regulatory treatment under Basel III capital adequacy requirements. A small trader or manufacturing firm, by contrast, represents genuine credit risk requiring rigorous due diligence, collateral evaluation, and ongoing monitoring. When the government offers 12-16% returns on risk-free instruments, the rational choice for bank treasury managers becomes obvious: accumulate government paper rather than lend to the real economy.

This crowding-out effect is not theoretical. Kenya's domestic debt stock has surged past 6 trillion Kenyan shillings (approximately €40 billion), with government securities now consuming an estimated 60-70% of available credit in the banking system. Meanwhile, private sector credit growth has decelerated sharply, with small and medium enterprises reporting credit denial rates that have doubled since 2022. The "mama mboga"—the iconic Kenyan street vendor or small grocer—now faces impossible loan conditions: interest rates exceeding 18-22%, collateral requirements of 150% of loan value, and processing times that stretch months.

For European investors and entrepreneurs operating in Kenya, this dynamic creates a paradoxical environment. On one hand, it signals macroeconomic stress: a government unable to finance itself through productive investment or export growth must raid the domestic capital pool. This typically precedes currency depreciation, inflation upticks, and deteriorating business conditions. The Kenyan shilling has already weakened 8% against the euro since early 2023, eroding profit repatriation for European firms.

On the other hand, the crowding-out effect creates specific sectoral opportunities. Companies with direct access to foreign currency—exporters, tourism operators, remittance recipients—remain insulated from local credit scarcity. Meanwhile, sectors dependent on domestic credit expansion (retail, construction, manufacturing) face margin compression and consolidation. European investors with patient capital and local banking relationships can acquire distressed assets or consolidate market share as smaller competitors collapse.

The government's response will be critical. If Kenya pivots toward genuine fiscal consolidation—cutting expenditure, broadening the tax base, reducing debt servicing costs—the crowding-out effect could reverse within 18-24 months. Conversely, if Treasury continues deficit spending while external debt servicing accelerates, expect accelerated currency depreciation, potential IMF intervention, and a full-blown credit crisis among non-bank financial institutions and microfinance providers.

Kenya's Central Bank has limited tools. Rate hikes risk compounding government borrowing costs and deepening the fiscal trap. Monetary easing invites inflation and currency collapse. The institution is caught between protecting financial stability and enabling government financing—a tension that typically resolves through currency devaluation and imported inflation.