More than a quarter of loan accounts in Kenya have been blacklisted by credit reference bureaus (CRBs) in a soft economy where costly credit has pushed thousands of borrowers into a debt trap.
Data from the CRBs reveal that 7.65 million of 29.72 million accounts were in default by the end of December, up from 3.89 million in March last year.
This reflects a jump of 96.6 percent in the nine months to December, underlining a worsening cash flow for the majority of Kenyans who are yet to fully recover from economic shocks of Covid-19 that triggered jobs cuts, salary cuts, freeze in hiring, and business closures.
The sluggish business environment emerged in a period that saw local banks increase their lending rates to match the rising costs of funds as banks and governments fought for funds.
The rise in the number of blacklisted loan accounts will jeopardise the chances of millions of Kenyans borrowing more to grow their businesses or for projects.
Loan defaults have remained stubborn into this year with the industry’s ratio of gross non-performing loans reaching a 16-year high rate of 15.5 percent at the end of February or Sh599.1 billion in December compared to Sh507 billion in March.
TransUnion — one of Kenya’s three CRBs— has attributed the rise in defaults to higher borrowing costs in a year when workers’ payslips shrank on increased taxes including the housing levy amid stagnant pay.
“The biggest driver has been the monetary and fiscal policies that have increased interest rates and taxation. If you look at someone salaried with a net pay of Sh50,000 and a loan repayment of Sh10,000, this meant that the net salary from which they paid the loan was reduced even as lenders raised interest rates,” noted Ann Njeru, a product manager at TransUnion.
During the year, borrowing costs rose as the Central Bank of Kenya (CBK) raised the benchmark lending rate in an attempt to contain inflation and rein in the depreciation of the shilling.
Data from the CBK, for instance, shows the average commercial bank lending rate soared from 12.77 percent in January to 14.63 percent in December as banks passed on higher borrowing costs to include the impact of the transition to risk-based credit pricing.
At the same time, the government implemented various revenue-raising measures which cut into borrowers’ disposable incomes including the 1.5 percent housing levy and higher deductions to the National Social Security Fund (NSSF). Kenyans are headed for more payslip deductions with the planned 2.75 social health insurance funding expected in the new financial year from July.
Lenders normally list loan accounts that have been in arrears for more than 90 days as non-performing, with factors such as job losses and high cost of living contributing to inability to repay.
The high rate of defaults has been cited as a reason for the reluctance of banks to lend to the private sector in the past few years while leaning towards government lending.
A negative credit record results in being denied loans or slapped with high interest rates and collateral demands by lenders.
As a result, the CBK has brought in a risk-based lending plan that will work alongside credit scoring that will allow the lenders to price in risk when issuing a loan.
The expectation is that this will protect borrowers from being locked out of the formal credit market, even those with previous bad loans on their records.
Kenya’s private sector activity was broadly steady in April, entering into expansion territory after contracting marginally a month earlier, a survey showed last week.
The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) stood at 50.1 in April, up from 49.7 a month earlier but below February’s 51.3.
Readings above 50.0 signal growth while those below point to a contraction. February’s figure was the first above-50 reading since August.
However, there are concerns that second-quarter performance could be affected by the effects of heavy rainfall.
In addition to the restrictive monetary and fiscal policies, the higher number of blacklisted loan accounts has been tied to loan accounts, previously appraised during the CBK-backed credit repair framework.
The apex bank had rolled out the initiative which sought to improve the credit standing of mobile phone digital borrowers whose loans were non-performing.
Under the initiative, financial institutions provided a discount of at least 50 percent of the non-performing loan outstanding as at the end of October 2022 while entering a repayment plan with the borrowers to clear the balance up to the end of May 2023.
According to TransUnion CEO Morris Maina, less than a fifth of borrowers regularised their loans under the initiative resulting in the jump in active non-performing loan accounts.
“The credit repair framework had great intentions in terms of rehabilitating people in default status, but it did not succeed as anticipated. We have seen less than 20 percent of that cohort repairing their credit by the time of the expiry of the framework,” he said.
The CBK has recorded increases in non-performing loans in real estate, trade, personal and household loans, energy and water and building and construction.
In response to the soaring defaults, financial institutions, in particular banks, have raised their loan-loss provisioning costs while tightening credit standards for new loan issuances.
The tightening of credit standards involves interventions such as the demand for more collateral or a reduction in the value of loans disbursed in sectors perceived as high risk.
