The majority of Kenya’s commercial banks now fear more than half of Kenyan borrowers and traders will default on their household and business loans, according to a new survey by the Central Bank of Kenya (CBK).
The projected rise in loan defaults to 54 per cent of borrowers is on the back of the worsening economic conditions in the country and the 39 banks fear this would add stress to their overall asset quality.
The defaults are a reflection of the struggles that Kenyans are undergoing in a battered economy marked by a string of job losses and a worsening cost of living crisis in recent months across nearly all sectors as companies intensify austerity measures to protect profits.
The banks fear non-performing loans (NPLs) - borrowed money whose scheduled payments have not been made by the debtor for a period of time, usually 90 or 180 days – will mainly be by individual borrowers and traders.
This is as businesses and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy struggle to service their loans as the economy falters again and a likely recession is feared.
Kenyans are enduring a record hit to living standards after the controversial Finance Act 2023 came into effect, ushering new taxes for individuals and businesses and consequently, more pain for consumers at a time when inflation has eroded incomes and purchasing power has been dented.
The Ruto government has defended its new taxes, which have been tipped to worsen the raging cost of living crisis.
Banks said in the CBK arising out of the expected defaults, that they will going forward tighten their lending standards but also step up loan recoveries setting up thousands of Kenyans for asset and property seizures through auctions.
The lenders that were polled by the CBK survey include tier-one banks Kenya’s largest bank Equity Bank, KCB Bank Kenya, NCBA Bank Kenya,
Co-operative Bank of Kenya (Co-op Bank), Standard Chartered Bank Kenya, Absa Bank Kenya, and Diamond Trust Bank Kenya.
Others polled in the CBK study include I&M Bank Kenya, Kingdom Bank, and SBM Bank Kenya among others.
The looming prospect of loan defaults is on the horizon at a time when Kenya’s banking regulator has raised its lending rates aggressively in order to combat stubborn inflation still ripping through the Kenyan economy.
Higher rates can be a boon to the bottom line of lenders as they rake in more interest income on lending. However, the prospect of rapid retail loan rates pain and a recession have triggered fears of a wave of loan defaults.
The share of loan defaults increased to Sh577 billion as of June this year, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures.
Gross loans issued by lenders increased by 3.3 per cent from Sh3.852.3 trillion in March 2023 to Sh3.980.5 trillion in June 2023.
The CBK data shows that 14.5 per cent of all loans were in default by the end of June, the sharpest 12-month increase in the recent past.
“The asset quality, measured by gross nonperforming loans to gross loans ratio deteriorated from 14.0 per cent in March 2023, to 14.5 per cent in June 2023,” says the CBK.
This was due to a 6.5 per cent increase in gross NPLs compared to a 3.3 per cent increase in gross loans.
For the quarter that will end this month, banks expect to intensify their credit recovery efforts in eight economic sectors signalling looming auctions.
The main sectors that banks intend to intensify credit recovery efforts are in Personal and Household (86 per cent) Trade (84 per cent), Manufacturing (78 per cent) Transport and Communication (76 per cent) and Real Estate (70 per cent).
CBK adds that most banks have adopted a tight credit risk appraisal, ensuring that facilities are well-secured and alternative sources of repayment available.
This could mean they are now more likely to ask for collateral such as title deeds, making it harder to access loans.
An earlier analysis of financial statements of top commercial banks for the half year ended June by Financial Standard revealed that a majority of the tier-one lenders have ratcheted up credit loss reserves by billions of shillings in response to heightened economic and credit market uncertainty.
Bank profits surged last year to record highs as the reduced impact of the Covid-19 pandemic resulted in resurgent economic growth and allowed banks to shrink huge loan loss reserves they had set aside at the onset of the pandemic.
But profits have shrunk or grown by fewer margins in the last six months as banks became less aggressive in reducing those cushions, while some larger lenders are reversing course and rebuilding them, further eating into potential profits.
The majority of the lenders now believe a turbulent macroeconomic environment characterised by sticky inflation, high interest and the depreciation of the shilling against the dollar justifies the need for caution and prudence in provision.