Looming crisis as top lenders stare at Sh500b in bad loans

A woman shows her loan approval on phone. [Getty Images] 

Kenya’s biggest banks collectively incurred a record jump in bad loans last year as concerns about an economic slowdown in the country that led to higher defaults among businesses and individual borrowers mount.

The rising defaults could force banks to cut back on lending to the productive sectors of the economy.

Analysis of financial statements of the top nine commercial banks for the full year ended December by The Standard reveals that gross non-performing loans (NPLs) - credit for which principal or interest has not been paid for 90 days or more - rose by Sh25 billion to Sh556.9 billion from Sh531.34 billion in the same period the prior year.  

KCB Group led the pack of afflicted banks, with its dud loans rising to Sh185.44 billion in the period from Sh147.35 the prior year.

It was followed by Equity Bank, whose bad loans jumped to 114.59 billion from Sh63.13 billion.

Co-operative Bank of Kenya (Co-op Bank) was also a huge victim of bad loans after they rose from Sh52.33 billion to Sh66.94 billion.

NCBA saw its bad loans go up to Sh44.55 billion from Sh39.13 billion, while Diamond Trust Bank’s (DTB’s) bad loans jumped to Sh43.64 billion from Sh32.23 billion.

Kenyan borrowers

NCBA saw its dud loans go up to Sh44.55 billion from Sh39.13 billion while Absa Bank saw its NPLs go up to Sh35 billion from Sh22.5 billion in the prior year. 

At the same time, Family Bank’s bad loans surged to Sh14 billion from Sh12.43 billion the previous year even as the bad loans by I&M customers jumped from Sh24.96 billion to Sh35.36 billion. However, Standard Chartered Bank’s bad loans went down to Sh17.22 billion from Sh22.57 billion in the period.

The bad loans crisis for the top lenders reflects the struggle Kenyan borrowers are undergoing in repaying their loans in an increasingly difficult economic environment. 

An earlier study by the banking regulator showed the majority of Kenya’s commercial banks feared more than half of Kenyan borrowers and traders would default on their household and business loans.

The survey by the Central Bank of Kenya (CBK) projected a rise in loan defaults to 54 per cent of borrowers. Banks with high levels of non-performing loans are unable to lend to households and companies.

This is harmful to the economy as a whole. When granting loans to their clients, banks always expose themselves to credit risk – the risk that the borrower may not pay back the loan. When this happens, the loan is said to become non-performing.

A loan becomes non-performing when the bank considers that the borrower is unlikely to repay, or when the borrower is 90 days late on a payment. CBK said earlier that non-performing loans are mainly in the building construction and manufacturing sectors.

This is as firms 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.

Banks have consequently stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures.

A spot check by The Standard showed earlier there has notably been a glut on the market of repossessed homes and office blocks as well as property, including cars, according to city-based auctioneers.

 “They have gone up in the New Year,” one auctioneer who spoke to The Standard said earlier, outside his repossessed goods yard in Kiambu, pointing to the dozens of notices of auctions placed by auctioneers in local dailies.

All sectors of the economy are currently grappling with escalating costs of raw materials amid new levies and taxes by the government and soft demand as rising prices of final products hit consumers’ spending power.

Economists worry that Kenyans could further clamp down on spending as prices increase and loans dry up, throttling the economy’s largest source of momentum and potentially triggering a recession.

The real estate sector is also a victim of the loss of income among households and businesses due to the lingering economic effects of the coronavirus, with owners of land and developed properties taking longer to sell their assets or contend with lower asking prices.

The National Treasury has warned that CBK’s fight to rein in inflation could tip the battered economy into a temporary recession.