How Kenyans borrowed to survive Covid-19 pandemic

The Covid-19 pandemic pushed Kenyans to borrow for survival as the disease destabilised the country’s economy, with thousands losing their livelihoods.

An analysis by Financial Standard on data on the demand for credit from 2019 to March this year shows loans to individuals and households went up by 14 per cent.

This compares to the pre-Covid-19 era when many Kenyans were able to comfortably meet their daily needs.

The data is contained in the Central Bank of Kenya Credit Officer Survey report, which shows in March 2019, the demand for personal and household loans stood at 39 per cent, the same as in 2018.

This figure, however, shot up to 43 per cent in December 2019 and 53 per cent in March last year, a 14 per cent increase.

The figures are based on responses from senior credit officers in registered commercial banks.

In the March 2020 report, 38 lenders and one mortgage finance company participated in the survey.

In the report, loans to the trade sector came in second after individual and household loans at 46 per cent followed by manufacturing at 31 per cent. The survey covered 11 sectors of the economy.

This saw gross loans rise by 2.62 per cent from Sh2.774 billion in December 2019 to Sh2.847 billion in March 2020.

“The growth in gross loans was mainly due to increased advances in the manufacturing, trade, personal/household and tourism, restaurant and hotel sectors,” reads the Credit Officer Survey Report for March 2020.

“The increased demand in the two sectors is attributed to increased demand for consumer goods and services.”

Consumer goods are products or utilities considered basic for a particular household. They may include clothes, electronics and even food.

The rise in the percentage of credit advanced to individuals and households, explained Samuel Nyandemo, a lecturer of Economics at The University of Nairobi, was in reaction to the impact of Covid-19 on the economy.

“When Covid-19 came, many peoples’ incomes were seen to be melting,” he said.

Dr Nyandiemo said since businesses were not bringing in profit as expected, many people were forced to take loans to survive.

“The incomes were dwindling so they had to cushion themselves from the devastating effects of Covid-19, leading to them taking loans,” he said.

This percentage of credit advanced to households and individuals, however, dropped to 31 per cent, according to the June 2020 Credit Officer Survey report, before shooting up again in September to 45 per cent.

And while the figure remained at 45 per cent of total loans as of March this year, it was still higher compared to the same period in 2019 before Covid-19 struck.

After it became apparent that the pandemic was not a passing cloud as may had thought, lending institutions became wary of advancing credit, especially the kind that had no collateral.

According to the September last year report, credit standards remained unchanged in seven economic sectors and were tightened in four sectors, including personal and household segments.

The others are tourism, transport and communication, and real estate.

Tightened credit is the unavailability of loans for the purpose it’s being borrowed for. It may be due to new conditions set by a financial institution or regulator or the dynamics of the market.

“Tightening of credit standards in the four sectors is attributed to the effects of Covid-19 pandemic,” reads the CBK report.

The report also notes that the expectation regarding general economic activity and removal of interest rate capping also contributed to the tightened credit in the various sectors.

Tightening in lending

Owing to the fact that most personal and household loans are unsecured, Nyandemo said defaults are more likely, which explains the tightening in lending.

“We will see a high degree of defaults because the economy has been affected with a lot of uncertainties given that we are told of another spike of the disease in July,” he said.

In the September 2020 survey, 69 per cent of credit officers listed personal and household loans among the leading Non-Performing Loans (NPL), which came third after tourism and hotels (72 per cent), transport and communication (72 per cent), and real estate (67 per cent).

This was a 30 per cent rise compared to 2019. “During the quarter under review, the respondents indicated that the level of NPLs remained unchanged in five economic sectors and increased in six sectors namely: trade, tourism, building and construction, personal and household, and transport and communication,” reads the September last year report.

This rise in the percentage of NPLs for household and personal use while linked to the general sluggish growth of the economy during the pandemic references the employment rates in the country, which dropped sharply as a result of banks becoming wary of lending as most of the laons are unsecured.

The Short-term Impact of the Covid-19 Shock on Employment in Formal Firms in Kenya (PEDL) report published by Private Enterprise Development in March shows that by April 2020, overall employment in the formal sector dropped by 16 per cent.

The data was sourced from analysing tax returns of private corporations and partnerships filing tax returns for their employees.  

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