Commercial banks pumped more money into government securities in the year to December 2018 even as they tightened credit to private enterprises and individuals, industry data shows.
Financial statements for the year ended December 31, 2018 show the 37 banks out of 40 invested Sh146 billion or 14.3 percent more to hit Sh1.175 trillion.
The lenders in turn earned 14.1 percent more or Sh125 billion last year compared to Sh110 billion a year earlier.
Lending to the private sector grew a paltry 2.4 percent in the same period, having been the biggest loser in the credit market following the coming into force of a law capping interest rates.
The credit growth remained well below the central bank's target rate of 12 to 15 percent, which is deemed adequate to support economic growth.
The data shows Kenya's seven biggest banks raised investments in government paper by 9.7 percent last year to Sh700.6 billion, in turn seeing their interest earnings from securities go up by 13.7 percent to Sh76.3.billion.
The tier one banks include KCB #ticker:KCB, Equity #ticker:EQTY, Co-operative Bank #ticker:COOP, Standard Chartered #ticker:SCBK, Barclays Kenya #ticker:BBK, DTB Bank #ticker:DTBK and Stanbic.
They all grew loan books at a slower pace of 3.6 percent or Sh57.3 billion to Shl. 63 trillion, and saw the interest income from loans to customers go up by a similar rate to Sh192.9 billion.
The Treasury's appetite for debt appeared to have grown in the past couple of years -- a development that has seen the government borrow heavily from local markets, crowding out productive sectors of the economy.
Kenya introduced interest rate controls in September 2016 with the enactment of a law that limits lending rates to not more than four percentage points above the Central Bank Rate.
This was in response to the high cost of credit that saw banks lend to private businesses and individuals at more than 20 per cent interest.
Commercial banks have, however, shied away from lending to individuals and small businesses and blame the legal caps for the slow rate at which credit is growing.
The banks, through lobby the Kenya Bankers Association (KBA), have argued that it would be more lucrative to lend to the government, which carries minimum risk in the wake of the controls.
The Treasury had earlier promised the International Monetary Fund (IMF) a repeal of the caps, in response to a sharp decline in credit growth but Parliament stalled the bid.