Non-performing loans in the banking sector increased sharply by Sh88 billion in one year to hit a record Sh570.6 billion in the 12 months ended April, signalling financial distress among businesses.
Fresh data from the Central Bank of Kenya (CBK) shows bad loans stood at Sh482.6 billion in April last year and rose 18.23 per cent within 12 months.
The CBK data shows that total loans disbursed by banks increased by 14.7 per cent in the same period to Sh3.924 trillion, up from Sh3.421 trillion, an increase of Sh503.1 billion. This means total non-performing loans (NPLs) exceeded the total loans disbursed during the year.
The ratio of gross non-performing loans to gross loans increased to 14.5 per cent in April this year up from 14.1 per cent last year.
The concentration of NPLs was mainly in trade, manufacturing, real estate, and personal and household sectors in December 2022, CBK’s Bank Supervision Annual Report 2022 shows. In December 2022, the value of bad loans in the trade sector hit Sh107.2 billion, which was 21.3 per cent of the total loans issued to the sector, making it the riskiest business segment to lend to.
The second-largest share of NPLs was in manufacturing, where Sh90.88 billion or 18.1 per cent of the Sh530.63 billion loans issued to the sector were non-performing. Real estate held Sh81.07 billion of the bad loans, translating to 16.1 per cent of the Sh467.17 billion worth of loans extended to the sector.
Other heavily affected sectors are personal and household, and transport and communications, which had Sh74.66 billion and Sh42.57 billion in bad loans, respectively.
“The increase in the non-performing loans was occasioned by deteriorating asset quality as a result of challenges in the business environment and delayed payments,” stated CBK. The sector regulator says it will put extra checks on the riskiest sectors to ensure that banks set aside enough funds to cater for possible defaults from them.
“CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions for the loans in the four economic sectors to mitigate the risk of default,” it said.
High inflation—primarily driven by increased food, fuel, electricity and cooking gas prices—in addition to a raft of new taxes, have diminished consumption, thus heavily hurting firms’ revenues. Stanbic Bank’s Purchasing Managers Index report for May, for instance, highlighted the struggles that private businesses are undergoing due to high inflation. According to the report, Kenyan firms reported a dip in new business for the fourth month in a row in May.
“Almost a third of surveyed businesses reported a decline in sales, with comments often linking this to the cost of living crisis and a resulting lack of purchasing power by customers,” it said.
But worryingly for firms, CBK has recently increased interest rates on loans, which means consumers will spend more to service them. A meeting of the Monetary Policy Committee (MPC) on Monday raised the benchmark lending rate to 10.5 per cent from 9.5 per cent— the highest since July 2016. The increase was also the highest since July 2015, when it was adjusted by 150 basis points (1.5 per cent). While increasing the benchmark interest rate, the MPC cited sustained pressure on inflation and observed risks for higher consumer prices, which in its view would hurt the economy.
“Overall inflation is expected to remain elevated in the near term, mainly due to the recent increase in electricity prices, removal of the fuel subsidy, and associated second-round effects. Additionally, a mini-survey of the agriculture sector in the first half of June revealed that prices of some key food items, particularly sugar and maize, remain elevated,” CBK said in a statement.
In May last year, CBK resumed gradual upward adjustment of the benchmark rate, which at the time stood at 7 per cent, to tame inflation. The cost of borrowing presently is at the highest level since July 2018, with the average commercial lending rate standing at 13.1 per cent as of April, according to CBK data.
The World Bank recently warned that pending bills amounting to billions of shillings owed to businesses by the national government and counties are pushing thousands of businesses to default on their loans.
In what is likely to be a boost to firms, however, the Cabinet this week approved the creation of the Pending Bills Verification Committee to probe the authenticity of pending bills amounting to Sh640.9 billion and advise on how they can be settled. The Committee will present its final report to the Cabinet within a year.
