Kenyan borrowers are increasingly turning to survival loans to meet pressing needs such as food and rent, pointing to rising debt distress that risks pushing the stock of loan defaults towards the Sh700 billion mark.
Kenya Bankers Association chairperson John Gachora said the industry was seeing a reduced appetite for loans towards capital expenditure such as construction or expansion of businesses. Instead, those borrowing for short-term needs are the ones driving up the growth in the loan book.
The scenario, coming on the back of 12-year-high interest rates, the elevated cost of living, and new or increased statutory deductions and taxes, has seen many borrowers run out of money required to foot day-to-day needs, including food and bus fare.
“The reality is, in such an environment, what we are seeing is that affordability of loans is going down. There has been less borrowing for capital expenditure. We are seeing more borrowing just for survival. People are borrowing to spend on short-term needs as opposed to for long-term investment,’ said Mr Gachora, who is also the managing director at NCBA Group.
The borrowing pattern lends credence to the recent observation by the employers lobby that increased monthly deductions have seen many employees breach the Employment Act 2007 which stipulates that deductions from an employee’s pay— whether statutory or voluntary— should not exceed two-thirds of their total salary.
Banks are worried that the increased appetite for survival loans may further increase the share of non-performing loans (NPLs) in the industry. This is because such borrowers may also be taking such loans from digital lenders.
NPLs ratio—a portion of loans for which interest has not been paid for at least three months— touched 15.3 percent in October, being the highest in 16 years, with only a slight decline to close December at 14.8 percent, according to the Central Bank of Kenya (CBK) data.
Mr Gachora says “It should be a concern for all of us” when more borrowers turn to survival loans because it means the monthly income is not able to meet basic needs. This puts into jeopardy the ability of such borrowers to service the loans.
“Loans should not be used for survival. That is why we are advising customers to look at their paycheck, even for those in mjengo (manual construction labour), and reserve a third of it for survival,” said Mr Gachora.
‘The moment you see people borrowing survival loans, it tells me that the one-third that is supposed to be reserved for survival is also getting depleted.”
The cost of living in Kenya has risen, but the minimum wage has not increased at the same pace, reducing the real minimum wage. In 2022, the minimum wage increased by 12 percent— the first review since 2018— but the cost of the minimum wage basket increased by an average of 22 percent, with food expenses being the key driver of the cost.
Salaried workers have seen their National Social Security Fund (NSSF) contributions jump up to Sh2,160 from Sh200 and a 1.5 percent housing levy deduction on gross pay, cutting their take-home pay.
The State deductions will rise even further with deductions towards healthcare insurance rising to 2.75 percent of gross pay starting July. This will take compulsory monthly State deductions, including taxes, to at least 21 percent from Kenyans earning Sh50,000 and above.
The rise in State deductions, coupled with an increase in banks’ interest rates, has added to the pain of workers who had tapped loans on the strength of their payslips.
Equity Bank Kenya has, for instance, informed customers that it has raised its interest rates to a maximum of 26.74 percent.
At 26.74 percent, a customer borrowing Sh1 million to repay within five years will have to contend with monthly servicing costs of about Sh213,500. Five years ago, when interest rates were capped at 13 percent, such a borrower would have incurred Sh206,500. This means an additional Sh7,000.
Bankers are asking borrowers to be cautious about tapping new loans now but instead reorganise their activities, including seeking longer loan repayment periods, to create some room for survival income.
“Anybody listening to me should be cautious particularly on new debt at this point. It is time to consolidate. It is time to look at your balance sheet and figure out a plan to overcome that debt,” said Mr Gachora.
The latest statistics from the International Labour Organisation on working poverty also show that 26 percent of working Kenyans are ranked as extremely poor, 29 percent as moderately poor and 25 percent as near poor.
This means that having a job in Kenya has not been enough to keep the majority of people and their families out of poverty, pointing to issues of job quality and the inadequacy of earnings in an economy where pay rises have been below inflation for three straight years.
