Summary

• This growing financial challenge has placed immense strain on both public finances and the private sector.
• Pending bills owed to contractors and suppliers have continued to grow, with unpaid obligations increasing to KSh 524.84 billion by June 2025, up from KSh 516.27 billion earlier in the financial year.
• The latest figures from Controller of Budget Margaret Nyakang’o emphasise the severity of the crisis and the ripple effects it is causing throughout the economy.

 

Presidential Directive

President William Ruto directly addressed the issue of pending bills this week on Wednesday evening during a meeting with the Kenya National Chamber of Commerce and Industry Mombasa chapter at State House, Mombasa. Responding to pleas from business leaders led by the Mombasa Chapter Chairperson Abdul Jamal, the President acknowledged the urgency of the matter and instructed the National Treasury to expedite the clearance of debts owed to government suppliers and contractors. Traders had warned that delayed payments were crippling their businesses, restricting liquidity, and in some cases causing outright closures.

Parliamentary Intervention

Against this backdrop, the Budget and Appropriations Committee is convening today at the English Point Marina Hotel in Mombasa. Chaired by Samuel Atandi, the committee will hold discussions with Treasury officials to examine the reasons behind the escalating debts and to chart a path towards sustainable solutions. Central to the discussions is Treasury’s recent reform that shifts the focus from “pending bills” to a more rigorous system of recording “payables.”

The committee regards this change as an important step toward accountability, ensuring that government obligations are not dismissed but are kept on record until fully settled. Controller of Budget reports indicate that state corporations and government agencies are accountable for 77 per cent of the arrears, totalling KSh 404.33 billion. In contrast, ministries, departments, and agencies owe 23 per cent, or KSh 120.51 billion. The Kenya Rural Roads Authority and the Kenya National Highways Authority are among the largest defaulters, with their arrears not only increasing but also incurring penalties and interest of KSh 25.28 billion by June 2025.

New Loans

The dialogue takes place as the government actively seeks external financing to alleviate fiscal pressures. Kenya expects to receive a KSh 96.9 billion loan from the World Bank between September and October 2025, part of which will support inclusive growth initiatives and strengthen budgetary backing. Last month, Kenya secured its first yen-denominated Samurai loan, worth KSh 22 billion, from Japan, at an interest rate of between 1% and 2%, backed by Nippon Export and Investment Insurance.

Simultaneously, the Treasury, led by Principal Secretary Dr. Chris Kiptoo, is negotiating with the International Monetary Fund for a new programme that could utilise unused funds from the recently discontinued Extended Fund Facility and Extended Credit Facility. These borrowing plans are based on the 2025 Medium Term Debt Strategy, which aims to diversify funding sources and promote concessional borrowing. The strategy envisions a blend of 25 per cent external and 75 per cent domestic borrowing to reduce Kenya’s vulnerability to volatile markets and mitigate exchange rate risks.

Timely inflows from these loans could provide the liquidity needed to settle supplier payments and rebuild trust in government financial processes. However, the broader issue of revenue collection remains. The Controller of Budget has already warned of a KSh 67 billion revenue shortfall in the 2024–25 fiscal year, a gap that continues to strain cash flow and hinder the timely disbursement of funds.

Analysis

The rise in pending bills to KSh 524.84 billion has created a liquidity trap that is spilling into the private sector. Suppliers, particularly small and medium enterprises, are bearing the brunt of delayed payments, with their working capital cycles stretched thin. To stay afloat, many have turned to banks for overdrafts, invoice discounting, and short-term loans. While this temporarily boosts credit demand, it increases exposure to defaults and places banks at risk.

From a financial system perspective, government delays disrupt cash flow predictability, increasing the risk of non-performing loans as businesses owed by the state struggle to service their obligations. The fact that penalties on unpaid bills have reached KSh 25.28 billion highlights the gravity of the delays and the cascading risks throughout the economy.

The country’s pursuit of concessional financing from the World Bank, Japan, and the International Monetary Fund (IMF) reflects a deliberate strategy to inject liquidity while reducing reliance on expensive commercial debt. If disbursed on time and managed prudently, these inflows could ease pressure on arrears and indirectly stabilise private sector cash flows. Delays or mismanagement, however, risk perpetuating the cycle of unpaid bills and bank exposure.

Implications for Business Investors and Banks

Liquidity risks remain high for businesses owed by the government, particularly SMEs, which lack collateral and are therefore more vulnerable to shocks. For banks, this creates short-term lending opportunities but also increased credit risk. Rising non-performing loans are a persistent concern, with prolonged payment delays likely to worsen the trend and lead to tighter lending standards.

There are also opportunities in structured supply chain financing. If the Treasury’s reforms to track payables are enforced transparently, banks could expand products such as invoice discounting backed by verified government obligations. Sectorally, contractors in infrastructure and county-linked suppliers are the most exposed, meaning banks serving these areas face concentrated risks but also potential gains if external loan inflows are channelled into debt clearance.

At the macro level, concessional borrowing through the Samurai loan and potential IMF support could stabilise the shilling and reduce domestic interest rates, lowering borrowing costs for businesses and stabilising repayment schedules. For investors, the government’s management of pending bills is a test of fiscal discipline. Successful clearance would enhance confidence in Kenya’s financial system, whereas further accumulation of risks would undermine sentiment, increase the cost of capital, and depress bank valuations.

Conclusion

For Kenya’s banking industry, the pending bills crisis is both a threat and an opportunity. It risks worsening defaults, especially among SMEs linked to government contracts, but it could also create new opportunities for supply chain financing if reforms are implemented effectively.

In the near term, banks are expected to remain cautious, tightening credit standards and pricing in higher risks. Yet the outlook for investors is clear: the performance of Kenya’s financial sector over the coming year will be closely tied to the government’s ability to clear arrears and manage its new concessional financing programmes.