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Bankers in Kenya face bleak future as job cuts, high loan costs fuel alarming rise in defaults

FINANCIAL STANDARD
By Patrick Alushula | April 12th 2016
Men hold placards offering temporal employment services

NAIROBI: Jacinta* wanted financial freedom, and National Bank of Kenya gave her hope she could get it.

When she got a job at the lender, she applied for a mortgage as soon as she was eligible to. She got Sh6.2 million at the attractive interest rate of 4 per cent.

But then, one morning in September last year, things fell apart. She got the devastating news that her services were no longer needed and she would have to join the ranks of unemployed Kenyans.

And as she began to wrap her mind around living life without a pay cheque, she got hit with the news that her loan repayments would increase to the market rate of 19 per cent within 90 days.

“When I was working, I was paying about Sh32,000 a month to service my mortgage. When I lost my job, I was told repayments would go up to Sh120,000. Where am I supposed to get a job that will give me this kind of cash in just three months?” she asked.

So what does she plan to do?

“I’ll default. Let them sell the house. What other options do I have? I tried finding a buyer within the three months I had, but did not find anyone,” she said.

MARKET RATE

Jacinta says her house is now valued at about Sh10 million, and she had hoped to sell it at something close to this figure. This would have left her with some millions of shillings in her account after repaying her loan to tide her over as she looked for a job.

In the meantime, the prudent thing for the State-owned lender to do, according to the Generally Accepted Accounting Principles (GAAPs, is to make provisions for Jacinta’s debt as a non-performing loan (NPL).

NPLs refer to money advanced to a debtor who has not made any scheduled payments for at least three months. Therefore, the loan is either in default or close to being in default.

Loans can be insured, with an insurance company stepping in to make payments if a client loses his or her job. But insurance on mortgage repayments, Jacinta said, only kicks in upon a borrower’s death.

And with the chances of employment getting slimmer the longer she stays out of a job, it is likely that National Bank will have to sell Jacinta’s house to recover her loan. This will take time.

Jacinta’s is not an isolated case.

One of the reasons the banking sector has dominated headlines this year is the toxic loans lenders have in their books that have threatened their stability.

And this is happening in the wake of heightened expectations from the calm yet hawk-eyed Central Bank of Kenya (CBK) governor, Patrick Njoroge.

NPLs had a huge impact on the financial performance of Chase Bank, which was put under receivership last week. In 2014, its bad debts were at Sh3.4 billion. This figure rose 249 per cent to Sh11.9 billion last year.

National Bank of Kenya closed last year with Sh11.7 billion in bad loans, up from Sh7.2 billion in 2014, which saw it register a Sh1.2 billion loss. Over the same period, NIC Bank’s NPLs increased to Sh14.3 billion from Sh6.8 billion, with its pre-tax profits rising marginally to Sh6.4 billion.

And the problem is not only with indigenous banks.

REDUCED PROFITABILITY

Standard Chartered Bank, which reported a 39 per cent drop in net profits last year, saw its NPLs go up to Sh14.6 billion from Sh10.7 billion in 2014.

Bank of Africa also took a hit with Sh9.7 billion in its books at the close of last year, which drove it to a Sh1.2 billion loss. In 2014, the figure was just Sh2.4 billion.

Barclays Bank of Kenya marked its 100 years of existence with Sh6.1 billion in toxic loans, up from Sh5.3 billion in 2014.

The figure for provisions for NPLs is also high, which means lenders are seeing bigger risks of defaults in the market.

StanChart’s loan-loss provisions went up 277 per cent from Sh1.3 billion in 2014 to Sh4.9 billion last year. Chase Bank’s provisions hit Sh2.1 billion from Sh794 million in 2014.

An increase in NPLs reduces banks’ profitability since they are forced to set aside money to cover the risk of default. These provisions are treated as an operating expense, thereby eating into profits.

Other lenders like National Bank, NIC, Bank of Africa and Barclays more than doubled their provisions for bad debts during the last financial year.

In a recent survey conducted by CBK, 46 per cent of credit officers polled said they expected more defaults this year. Only 32 per cent predicted improved loan servicing.

Last week, Dr Njoroge said the high NPLs could have been a result of weak lending policies and management failures.

Further compounding these corporate governance issues is that there has been a rise in the number of people being retrenched as businesses struggle to profit.

According to the latest annual Global Risks Perception Survey by the World Economic Forum, 88 per cent of 33 economies in sub-Saharan Africa list unemployment or under-employment as among the top five worries of business executives.

“Lay-offs disproportionately affected middle-skilled jobs, while most job creation in the recovery has taken place in lower-wage jobs and in temporary and fixed-term employment,” notes the report.

LENDING ENVIRONMENT

Last year alone, more than 10 companies in Kenya either laid off staff, or announced plans to do so.

The latest firm was Kenya Airways, which plans to axe 600 workers. Uchumi last month sacked 253 workers. In February, Fluorspar Kenya made the painful decision to close shop after a prolonged fall in global commodity prices.

“Today’s announcement will unfortunately result in the termination of employment of employees across all levels of staff,” said company CEO Nico Spangenberg. The firm had let go of 195 workers last year.

After announcing in 2014 that it would lay off up to 300 workers, loss-making miller Mumias Sugar closed its water bottling plant, rendering100 people jobless.

The struggling tourism and steel sectors have also had to let go of thousands of workers.

These job cuts are bound to cause ripple effects, including enhanced chances of bad debts in lenders’ books.

According to a FinAccess Household Survey conducted between August and October last year covering 8,665 households, most Kenyans said they use bank accounts for receiving money, such as salary. The report also found that of all financial service providers, banks experience the highest levels of closure or dormancy of accounts.

“The main reason given for stopping to use a bank account is a loss of income source,” noted the survey.

This is the lending environment under which banks operate. They advance deposits to people who, while still in employment, score highly as good borrowers. However, once they lose jobs, lenders are left in a difficult positions.

This is worsened by the fact that many banks are dropping formalities for borrowing as competition for customers, and profits, rises.

Now with just a pay slip and national identity card, one can walk out of a banking hall with a loan. Or better yet, one can complete the application process online.

For many banks, the role of selling loans has been left to marketers who are paid on commission. The marketers, in their quest to make ends meet, overlook the risk of the customer and lure them into borrowing.

The marketers will visit workplaces, dangle the attractive features of the loan, and in a lot of cases, workers sign up.

This boosts marketers’ incomes, but at the expense of the bank.

A banker, who asked not to be named as she is not authorised to speak to the media, told Business Beat that the loan recovery department where she works is struggling with loans that were loaned out recklessly.

“Having to recover loans that were loaned out through marketers whose ambition was to make money is tough. You come across many touching cases of clients who had no option but to default. They were offered cash at a desperate time, and took it without much thought,” she said.

LACK SECURITY

She added that in some cases, underwriters negotiate with high-risk borrowers to lend them cash without proper documentation in return for a share of the loan amount.

However, when such borrowers lose their jobs, banks are hit with the reality that they lack security to recover the money loaned out.

According to a survey released in February by Financial Sector Deepening Trust (FSD Kenya), three in 10 Kenyans would rather educate themselves or their family than put food on the table or start a family. Over 21 per cent of those surveyed said education was the reason they had taken loans, while 33 per cent said they were saving to pursue an education.

But it usually takes time for the investment in education to start paying off, probably through better employment. This is unlike with someone borrowing for activities such as investing in business.

However, Erick Musau, a senior research analyst at Standard Investment Bank, urges caution in linking lay-offs to NPLs.

“The economy has been creating jobs despite the lay-offs. Some of the NPLs may not be due to poor economic performance but insider lending, which has attracted integrity questions,” he said.

Looking at the four lenders with the highest provisions for NPLs — Chase Bank, National Bank, StanChart and NIC — insider loans and advances went up by 64.8 per cent.

In 2014, their combined insider loans — cash advanced to employees and directors — were at Sh16.1 billion. This increased to Sh26.5 billion by the end of last year.

In Chase Bank’s case, CBK said the lender had irregularly advanced Sh16.6 billion, a huge chunk of this going to companies associated with its directors. One director loaned himself Sh7.9 billion with inadequate security and beyond regulatory limits.

LEANER STAFF

But as banks continue to innovate and embrace leaner staff numbers to cut costs and maximise profits, they may be shooting themselves in the foot. Bank employees get preferential interest rates, which are usually in single digits. When these staff are let go of, aside from losing the salary most rely on to service the loan, they are also hit with market rate repayments.

Mid last year, for instance, banks revised their lending rates to as high at 23 per cent.

And in a competitive market where banks are eager to attract as many clients as possible, many borrowers owe more than one bank cash, a lot of the time on inadequate security. Therefore, in cases of default, lenders are forced to compete with each other on who should recover their funds first.

Higher interest rates have piled the burden on borrowers. CBK has been urging banks to lower borrowing rates, but not much has been achieved. According to data from the regulator released in February, average lending rates are now at 18.3 per cent.

This has seen a rise in the interest margins earned by banks to 10.38 per cent.

Dennis Otieno, a business analyst with a local bank, blamed the high number of defaulters on interest rates.

“Sudden increases in interest rates make borrowers give up on servicing loans. My friend took a mortgage and was servicing it at Sh60,000 per month, but just after eight months, this increased to Sh130,000,” he said.

However, banks are in dilemma on this front. Just like insurers charge higher premiums when they anticipate higher chances of the risk assured occurring, so do bankers. They charge more for loans when the risk of default is more likely.

“They are justified to add risk premiums, but not to the extent that they have. This is partly why borrowers abandon their loans altogether,” Mr Otieno said.

* Name changed to protect privacy.

[email protected]

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