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IMF warned Kenyan banks about dangerous lending habits

By Moses Michira | April 8th 2016
By Moses Michira | April 8th 2016

Former CBK Governor Njuguna Ndung’u was warned about dangerous lending habits among local banks months before they started sinking.

The International Monetary Fund (IMF) issued the caution early last year, saying while Kenyan banks were growing rapidly in profits and lending, they were not setting aside enough reserves to cushion against defaults.

Now, a sharp upward review of the reserves — technically known as provisions for bad debts — has shaved the profits of many lenders and sent several into losses.

“The banking sector remains profitable and well-capitalised, but provisions are lately lagging behind a pickup in NPLs [non-performing loans], which moderated slightly in September (5.5 per cent of total loans),” the IMF said in a report complied in January, last year.

An NPL is the sum of borrowed money upon which the debtor has not made the scheduled payments for at least three months, indicating that the credit facility is in either in default or close to being in default.

“Credit growth (25 per cent) continues to outpace deposit growth (20 per cent) reflecting a more intensive use of medium-term mostly concessional foreign currency lines for SME project financing,” the US-based financial institution warned.

While the caution was not specifically directed to Prof Ndung'u, it should have acted as a wake-up call for the CBK where he was boss, of the weaknesses in banking supervision.

Failure to match the growth of loans and the provisions means that the banks were in fact bloating their profits, since the funds set aside were treated as expenses.

Several lenders, including National Bank of Kenya and the Bank of Africa, have seen a sharp fall in profitability, following the review of their provisions for bad and doubtful debts in the year to December.

Banks were directed to review and re-classify their loan portfolios soon after Patrick Njoroge assumed office, incidentally from the IMF, which would be responsible for the disruption in profits growth in the banking sector.

Until last year, commercial banks had enjoyed uninterrupted profits growth for over a decade, with indigenous banks like KCB and Equity edging out multinational giants Standard Chartered and Barclays.

A sharp rise in interest rates by up to 10 per cent in mid-2015 is feared to have contributed to the jump in defaults, CBK said in a previous media briefing.

Borrowers found it more difficult to keep up with the higher loan repayments occasioned by the spike in interest rates, in a period that was also difficult for employers.

Several local firms reduced their workforce, pushing thousands of employed people to joblessness – which would also explain the rise in loan defaults.

Prof Njuguna (right) is, however, credited to have supported financial inclusion and expansion of domestic credit through such avenues as mobile phone-based lending platforms.

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