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Kenyan manufacturers increased their borrowing in the second quarter of 2025, leveraging a relaxed monetary policy despite a notable slowdown in the sector's overall growth. This trend highlights the industry's strategic response to more favourable lending conditions.
Kenyan manufacturers borrowed an additional KSh 17.2 billion in the second quarter of 2025, bringing the total loans to the sector to KSh 598.3 billion. This increase is attributed to a relaxed monetary policy by the Central Bank of Kenya (CBK), which has seen a series of interest rate cuts. The CBK's benchmark lending rate, the Central Bank Rate (CBR), was reduced to 9.25% in October 2025, marking the eighth consecutive cut since August 2024. This sustained easing aims to stimulate private sector lending and support economic activity.
Despite the rise in borrowing, the manufacturing sector's real Gross Domestic Product (GDP) growth slowed significantly, expanding by only one per cent in the three months ending June 2025, compared to 3.2 per cent in the same period in 2024. This indicates a complex economic environment where access to credit is improving, but other factors may be hindering overall sector expansion.
The manufacturing sector is a critical pillar for Kenya's economic development, yet its contribution to the GDP has seen a substantial contraction over the past decade, falling from approximately 12 per cent in the 2012-2013 fiscal year to 7.2 per cent in 2024. This decline jeopardises Kenya's long-term ambitions for structural economic transformation and job creation. The government, under the Bottom-Up Economic Transformation Agenda (BETA), has prioritised key sectors including manufacturing, aiming to increase its GDP contribution to 20% by 2030.
The Central Bank of Kenya has been actively pursuing a less restrictive monetary policy since August 2024, with Governor Kamau Thugge noting that this approach is intended to stimulate the economy. The overall average lending rate by commercial banks was 15.44% as of May 2025, with some banks offering rates as low as 10.36%.
The Kenya Association of Manufacturers (KAM) has launched the Manufacturing Priority Agenda (MPA) 2025, a strategic roadmap to strengthen local industries and enhance global competitiveness. Key to this agenda is ensuring a stable and predictable policy environment, including the implementation of National Tax Policy guidelines and a revised National Industrial Policy. Manufacturers have consistently raised concerns about high and unpredictable taxation, high operational costs, and regulatory unpredictability, which they argue deter long-term investments.
The government's efforts to improve the ease of doing business are ongoing, with the Nairobi International Financial Centre aiming to position Kenya as a regional investment hub and attract USD 2 billion in Foreign Direct Investment (FDI) by 2028. This includes addressing liquidity challenges within the manufacturing sector.
Tobias Alando, CEO of the Kenya Association of Manufacturers (KAM), has emphasised the need for intentionality in policy reforms to enhance the sector's global competitiveness. He highlighted concerns over excessive taxation, high operational costs, and regulatory unpredictability as major challenges. Bidco board chair Vimal Shah has criticised the current licensing regime, stating that it stifles small start-ups. Dr. Juma Mukhwana, Principal Secretary for Industry, has stressed the importance of local manufacturing for economic growth and urged African nations to invest in their own industries.
While lower interest rates offer an opportunity for manufacturers to access capital, the slowdown in sector growth suggests that other significant challenges persist. These include high raw material costs, increased labour expenses, excise duties, energy price hikes, and forex volatility. The influx of cheaper imports also continues to disadvantage local manufacturers. Unpredictable policy shifts and a complex regulatory environment further create an unstable climate, discouraging long-term investments.
Kenya's public debt remains a concern, reaching KSh 11.5 trillion as of May 2025, with debt servicing absorbing a significant portion of government revenue. This limits funds available for development spending and could impact the government's ability to implement supportive industrial policies. However, the government has recently converted three dollar-denominated railway loans from China into yuan, aiming to save approximately USD 215 million annually on interest payments.
The full impact of the sustained interest rate cuts on the broader manufacturing sector's growth trajectory remains to be seen. While some banks have reduced their lending rates, the average commercial bank lending rates remain relatively high compared to the CBR, raising questions about the effectiveness of monetary policy transmission. The upcoming Finance Bill 2025 is also a point of concern for manufacturers, who anticipate further cost escalations.
Observers will be closely watching the impact of continued monetary easing on manufacturing sector growth and investment. The implementation of the Manufacturing Priority Agenda 2025 and the government's commitment to creating a stable and predictable policy environment will be crucial. The upcoming Finance Bill 2025 and its potential implications for manufacturing costs will also be a key area of focus. Furthermore, the effectiveness of the new risk-based credit pricing model in translating lower CBR to more affordable commercial lending rates will be important to monitor.
Kenya's affordable housing project is viewed as a significant opportunity to revive the manufacturing sector by creating substantial demand for construction materials. Additionally, discussions around green industrial policy are gaining traction as a means to drive economic growth and address energy poverty.
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