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Manufacturers shake banks with Sh133bn loan defaults
Manufacturers have overtaken traders as the biggest defaulters of loans, reflecting the rising operation costs for the sector which has been hit hardest by elevated inflation as well as new and higher taxes.
The sector’s stock of non-performing loans (NPLs) jumped 59.2 percent to Sh133.7 billion in the year to September 2023 from Sh84 billion a year ago, according to data published by the Central Bank of Kenya last week.
The jump came in a period when manufacturers complained of persistent cost pressures emanating from new and higher taxation measures as well as increased cost of fuel and a surge in electricity bills. For a sector that largely relies on imports, manufacturing firms have also been grappling with costly raw materials as a result of global supply chain constraints amidst a sharp depreciation of the shilling against the major global currencies.
The business expenses have been exacerbated by increased interest rates which have in turn pushed up finance costs for factories.
“Fiscal policies (taxes) have also contributed. For example, the Export and Investment Promotion Levy [at the rate of 17.5 percent] has had a huge impact on the increase of imported raw materials and intermediate goods for manufacturing,” Antony Mwangi, the chief executive of Kenya Association of Manufacturers, said on email.
“Furthermore, consumers’ purchasing power has been dwindling due to the high cost of living, making it almost impossible for them to purchase the finished goods. The low demand for manufactured products has reduced manufacturers’ cash flow and impacted the ability of businesses to meet their financial obligations such as debt payments.” The CBK data shows the NPLs held by the manufacturers toppled those in the trade sector, which grew at a slower pace of 19.2 percent in the review period to Sh127.5 billion.
More than a fifth (21.5 percent) of the Sh622 billion loan book for the manufacturing sector was in default by last September, the industry data indicates, compared with 17 percent a year earlier.
The NPLs ratio for manufacturing was only higher than building and construction’s 26.3 percent. The building and construction sector has been rocked by rising pending bills amidst a reduced budget for development projects by the William Ruto administration.
“Our finance costs, interest and devaluation of the Kenya shilling have increased by 110 percent, while the cost of fuel, electricity and associated running costs are up 38 percent,” Bharat Shah, the chairman of Kenafric Industries, told the Nation last month.
Overall, the stock of bad loans climbed 25.5 percent in the review period to Sh616.9 billion.
That was an equivalent of 15 percent of the banking industry’s Sh4.1 trillion loan book.
The bad loans were projected to continue climbing on higher interest rates and taxes, which have eaten into earnings for firms and households.
“We expect the NPL ratio to increase by [one to two percentage points] by end-2023 due to increased debt-servicing costs and delayed repayments by government contractors and parastatals before the trend reverses in 2H24 (second half of 2024),” global credit ratings agency, Fitch Ratings, wrote in African Banks Outlook for 2024 last month.
“Retail loans will also be pressured by high-interest rates and a decline in real disposable income following the recent tax hikes.”
Manufacturers have estimated costs to have escalated by a third on average last year, with most firms passing a fraction of the expenses to the consumers out of fear of losing market share if they increased prices in line with growth in costs.
The Ruto administration has pledged to institute policies which will expand manufacturing’s contribution to the gross domestic product — a measure of all economic activity by individuals, companies and government — from 7.8 percent in 2022 to 20 percent by 2030.
The ‘Kenya Manufacturing Agenda 20 by 30’ aims to maximise “opportunities available to spur local industry’s growth”. The sector’s growth has, however, been modest, expanding 2.0 percent, 1.4 percent and 2.6 percent, respectively, in the first, second and third quarter of 2023, well below the projected double-digit growth.
The administration has identified leather and leather products, building and construction materials, garments and textiles, dairy products, edible and crop oils and tea as the value chains which will place the sector onto a sustainable growth path.
“Manufacturing has the potential to create high quality jobs and increase the standards of living in a country. Therefore, a weak manufacturing sector deprives the country of much-needed jobs and revenue,” Ken Gichinga, chief economist at Mentoria Economics, said.
“Creating a low-cost manufacturing base can propel Kenya's industrial goals. This can be achieved by reviewing and creating a competitive tax policy that complements all the factors of production.”
