Let’s discuss an open secret. Kenya’s elite has turned Kenya into their debtor. How? Well, Kenya borrows more locally than abroad.
Collectively, we owe, according to the Institute for Economic Affairs’ brilliant public debt counter KSh 6.7 trillion to Kenyan lenders, out of KSh 12.3 trillion total public debt. We owe foreigners KSh 5.6 trillion in comparison.
Politically Exposed Persons – i.e. our leaders or their associates – own or control Kenya’s leading domestic creditors (banks and insurance companies). Over time, these PEPs have accumulated, at our expense, the ability to influence the government’s borrowing plans.
At its core, Kenya’s domestic debt is now a transfer system: taxpayers fund interest payments that flow into banks and insurance companies owned by the country’s political class.
The system is legal, sustained by conflicts of interest so pervasive that the question of “who benefits” is no longer in doubt. With government policy set to increase reliance on domestic borrowing to three-quarters of total debt by 2028, the rewards to this hidden circle of beneficiaries will grow, deepening inequality while tying the country’s fiscal future ever more tightly to the fortunes of its elite.
By 2023, interest payments on domestic debt were double the interest paid on external loans. Yet Kenyans focus only on international lenders.
The ratio reached a 70:30 split of domestic and international debt interest: KSh 533.689 billion (USD 4.13 billion) domestic debt interest (70%) to KSh 218.594 billion (USD 1.6 billion) external debt interest.
And yet, anger over Kenya’s indebtedness expressed in the 2024 Gen-Z uprising was targeted externally, as if the larger part of the national debt, held by local elites, doesn’t exist. This tendency to overlook local contradictions whilst identifying external causes of pain is storied.
Funding government internally is a goal worth pursuing, but in the Kenyan context of elite corruption and state capture, it is prudent to be inquisitive about who holds over one quarter of the entire national debt. Particularly so, as the official strategy is to increase the gross borrowing share of domestic debt relative to external debt to a ratio of 75:25 by 2028.
Unlike the external public debt register where the names of the external creditors lending money to Kenya are disclosed, the identity of the domestic lenders are not. This is not right.
The law says domestic debt must be used for development purposes only. Yet Treasury bonds are unlawfully used to finance recurrent government expenditure instead of development expenditure.
Happily, since 2019, there has been recurring questioning of the identity of the creditors holding domestic debt. I hope there will be support for recent campaigns to challenge the legality of Kenya’s domestic debt.
In question is whether or not the domestic debt is odious because such loans are used to finance recurrent expenditure in violation of Public Finance Management Act, which requires and restricts domestic borrowing to specified development projects.
Let us not wait to discover that Kenya’s domestic debt is a decades-long illegal borrowing spree that offends the constitutional principle of inter-generational equity.
But first, let’s understand the political economy of our banking and insurance sectors.
At independence, all commercial banks and insurance companies were foreign owned. After independence, the government established state owned banks in the 1970s just as it became clear that attempts to Africanise the commercial banking and insurance sector via employment were not successful as the necessary workforce had yet to be trained.
In response, the Ndegwa Report of 1971 argued that the slow pace of Africanisation of the financial economy eight years after independence was because the best educated Africans were in public service, needlessly restricted from doing business by unsuitable conflict of interest rules.
Thereafter, civil servants in the Treasury, Central Bank of Kenya and the Ministry of Economic Planning were offered and took up shareholding in the largely foreign commercial banking sector. By the 1980s, many of these public officers had incorporated or bought their own banks and insurance companies, whilst still holding government jobs as the regulators and policy makers. Senior politicians joined them in investor pools formed to buy shares in leading financial sector institutions. And the beat goes on.
Our domestic debt market is vulnerable to collusion between the policy side and the credit supply side.
Today, the ownership of the 38 licensed commercial banks and 60 licensed insurance companies, is concentrated in a tiny group related to PEPs, past and present. Scan the list of top shareholders in annual reports, and you will find members of the families or heirs of four of Kenya’s five presidents, several former permanent secretaries of the Treasury, at least two governors of the Central Bank, the longest serving attorney general, at least three heads of the Civil Service, CEOs of state-owned enterprises, police and military chiefs, and parliamentarians ( past and present).
A profitable conflict of interest.
