Lack of financial literacy behind soaring loan defaults in Kenya - study

The surge in credit access, especially among under-35s, is unmatched by financial literacy, leading many borrowers into avoidable debt cycles, according to new findings.

This is the verdict from a recent survey by one of the three credit rating agencies, TransUnion. It established that one out of six borrowers in Kenya is a defaulter.

According to the report, the risks are especially high for first-time borrowers unaware of how loan defaults, late payments, or even small borrowing decisions significantly affect their future credit access.

“Credit, when used wisely, can be a powerful enabler, opening doors to education, entrepreneurship, and personal growth,” said TransUnion CEO Morris Maina.

“But without a solid foundation in financial literacy, we risk seeing many young people excluded from future economic opportunities because of poor credit decisions made today.”

According to him, while formal financial access has increased to 84.8 per cent of Kenyan adults (FinAccess 2024), the reality behind the numbers is more complex.

Digital loans have become the entry point for millions, but without an adequate understanding of interest accumulation, loan terms, or credit scoring, many borrowers are left vulnerable.

This report is coming at a time when the country is facing the worst loan default rates in two decades as tough economic conditions continue to weigh heavily on households and businesses.

Fresh data from the Central Bank of Kenya (CBK) shows that the ratio of non-performing loans (NPLs), those unpaid for over 90 days, rose to 17.6 per cent by June 2025, up from 17.4 per cent in April.

Increases in NPLs were noted in trade, personal and household, tourism and hotels, and building and construction,” said CBK Governor Kamau Thugge.

From a total loan book of Sh4.045 trillion issued by banks as of December 2024, the spike in NPLs suggests that more than Sh712 billion is now at risk of not being recovered.

The CBK links this surge to job losses, stagnant incomes, and the overall rise in the cost of living, which have made it difficult for borrowers to service their loans.

Personal and household loans, in particular, have become a major concern, with nearly 40 per cent of banks expecting defaults in this category to worsen.

While the regulator is blaming the rising NPLs on the tough economy, firms handling borrowing records are urging young and first-time borrowers to regularly monitor their credit status using available tools designed to help them track and improve their credit scores.

“Encouraging smart credit use isn’t just about personal finance; it’s about building a generation that can participate meaningfully in Kenya’s economy. When young people are given the tools to make responsible financial choices, the ripple effect is felt across families, communities, and the country at large,’’ Maina said.

He agrees that early education around responsible credit use is now more important than ever.

Personal finance coach and former banker, Kepha Obol, is worried that young people now habitually borrow to fund nights out, impulse purchases, or the latest gadget.

“What follows is a cycle of dependency, stress, and reduced financial health, a far cry from the soft life they sought.”

According to him, this pattern is becoming increasingly common in urban Kenya, where young professionals, eager to signal success, end up committing large portions of their income to consumer goods, entertainment, and appearances.

The latest survey by the Digital Financial Services Association of Kenya (DFSAK) shows that Kenyans are borrowing an average of Sh500 million daily, amounting to Sh15 billion monthly.

The report also highlights that over eight million Kenyans, about 16 per cent of the population, actively use digital lending services each month.

A past survey showed that at least 58 per cent of young people aged 22-835 years borrow mostly over the weekend and at night, pointing to the fact that most of the credit is used on leisure.

On Friday, a local fintech firm, Spin Mobile LLC, unveiled Taswira, an application that is expected to transform how individuals and households manage their money, making sure that every coin counts.

According to the firm’s CEO, Dr. Victor Kiplagat, tracking your expenses helps you understand your spending habits. “Categorizing your expenses into food, rent, shopping, utilities, and fees provides insights into spending and areas where you can save.”

“Taswira's gives real-time spending insights, making it easy to live within your means, build towards your goals, and do it all without stress or complexity,’’ Kiplagat told the Star.