Bad loans burden puts pressure on Kenyan banks

The stock of NPLs expanded by 7.8 per cent to Sh64.9 billion by March 31, 2009 from Sh58.3 billion the previous year, according to the April 2009 CBK monthly review.

“As a result, asset quality, which is measured by the proportion of net non-performing loans to gross loans deteriorated to 3.7 per cent from 3.6 per cent during the same period,” the CBK said.Loss provisions rose by 14 per cent in the year to March 2009 compared to similar period in 2008.

This state of affairs led the IMF to warn that the quality of loan portfolios is likely to deteriorate in the months ahead, particularly in banks that are exposed to tourism and export sectors.

The CBK report however, points to some improvement in profitability and deposits which went up by nearly 14 and 17 per cent, respectively, compared to 2008.

The IMF report was prepared after discussions with Kenyan government officials to determine future engagements with the fund following Nairobi’s request for balance of payment assistance to supplement the low foreign exchange receipts in the past 18 months.

It was at the same meeting that the Central Bank promised to act to ensure that the financial institutions concerned do not reach crisis point.

The CBK has not publicly reported the state of the banking sector in the same pointed terms as the IMF, whose May 15 report is posted on the institution’s website.

Some analysts said publication of the report may be a signal that the IMF intends to pile pressure on the government to intensify its bank supervision.

“To address the increased risks to the financial sector, the CBK should intensify its oversight to ensure that banks are correctly classifying loans and making adequate and timely provision for bad and doubtful loans,” the IMF says.

Reports indicate that the CBK has asked for technical assistance to develop a contingency plan for the financial sector, showing a readiness to act in the event that the situation deteriorates.

Fear of default
Tiberius Barasa, an economist with Institute of Policy Analysis and Research (IPAR), warned that a deterioration of the economy could lead to a situation where banks would not lend to any sector due to fear of default, pushing the economy downward, he said.

“I think measures being put to revive the economy should work for all sectors. Banks will be affected all the more if the economy does not perform well,” he said.

Action by the Central Bank against the commercial banks, he said, should be tempered with the understanding that the economy has been affected by shocks in the past year but the situation was likely to improve for all sectors when the economy turns for the better.

In Kenya, the minimum capital assets ratio (CAR) is 12 per cent, a ratio that the multilateral body noted that all banks reached in 2008 as was case for the previous year.