The financial sector continues to shrink under the blows of Covid-19 which has seen bank performance decline sharply due to bad loans.
Bank profitability in April dropped by 87.7 per cent compared to the same month in 2019.
Data from the Central Bank of Kenya (CBK) shows that commercial banks registered a profit before tax of Sh7 billion in April, compared to Sh56.8 billion in the same month last year.
This is as most lenders set aside cash as insurance against the spike in bad loans.
Profit before tax for the banking sector was on upward trajectory until the effects of Covid-19 started being felt around February as the world shut down, affecting such sectors as hospitality and aviation.
In January, banks had made a gross profit of Sh13.2 billion. This went up to Sh24.7 billion in February, Sh38.4 billion in March before plunging to Sh7 billion in April.
Experts have blamed the reduced profitability on a surge in non-performing loans (NPLs), or loans which have not been serviced for more than three months.
CBK’s Monetary Policy Committee (MPC), the financial regulator’s highest decision-making organ, noted in a statement that although NPLs in the banking sector remains stable and resilient, the ratio of total bad loans to gross loans rose to 13.1 per cent in June compared to 13 per cent in May.
Year-on-year, the ratio was at 12.6 per cent in June last year. “NPL increases were noted in the manufacturing, trade and personal sectors, due to a subdued business environment,” said MPC.
As people’s incomes dwindled, bad loans in the period under review rose sharply to Sh376 billion, or by 24 per cent, from Sh302.5 billion in April last year as borrowers distressed by the pandemic struggled to service their loan obligations.
Following the stringent containment measures aimed at curbing the spread of Covid-19, a number of businesses have shut down even as hundreds of thousands of employees have been laid off or sent on compulsory leave.
A volatile environment has also seen banks refuse to lend to the private sector, with most of them parking their excess liquidity in government securities at low-interest rates.
Workers who have been lucky to remain on payrolls have had to consent to salary cuts, a situation that has seen most of them negotiate for a change in terms of their personal loans.
So far, commercial banks have restructured loans valued at Sh844.4 billion.