Kenyan banks face drop in new loans as EU crisis bites

A deepening of the eurozone crisis could hit Kenyan banks through decreased demand for credit and an increase in non-performing loans, the International Monetary Fund (IMF) has said.

The austerity measures being implemented in Europe have pushed most economies on the continent into recession, constraining consumers’ purchasing power and as a result reducing demand for Kenyan exports to the top trade partner.

Tourism inflows are also likely to dwindle if Europe, a top source of tourists, sinks deeper into economic crisis while remittances and foreign direct investment may also see major declines —similar to what happened in the 2008-9 global financial crisis.

“Kenya’s merchandise exports and tourist receipts rely significantly on European exports, so growth could slow quite significantly, at least 0.5 percentage points, in both 2012 and 2013,” said the IMF report.

READ: Europe’s fiscal woes force Kenya export market into lean times

Kenyan banks benefit largely by lending to exporters and businesses that have links to Europe. Trade between Kenya and Europe increased to Sh135 billion last year from Sh109 billion in 2010.

“We are likely to see the commercial banks’ balance sheet contract and even more non-performing loans if the crisis in Europe escalates as domestic demand will go down,” said Kethi Ngoka-Kisinguh, a local economist at the IMF representative office in Nairobi.

She was speaking during release of the IMF report at the University of Nairobi. Ms Ngoka-Kisinguh said any deterioration in Europe’s economy would increase global risk aversion, as multinational banks squeeze credit conditions across the world.

The report shows that a 31 per cent credit expansion in 2011 reduced capital adequacy by 1.4 percentage points to 19.4 per cent —a favourable level, however, against the legal requirement of eight per cent.

In Uganda, Tanzania and Rwanda the ratio was 20.3, 17.8 and 27.2 per cent compared to 20.2, 18.5 and 24.4 per cent, respectively, in the previous year.

Global output is expected to fall by two per cent by 2012, which could in turn result in declines in oil and non-oil commodity prices of 17 and 10 per cent, respectively. This could reduce earnings from commodity exports from sub-Saharan Africa.

In the World Bank’s Global Economic Prospects report also sees the European crisis as posing risks to sub-Saharan Africa economies.

The ongoing banking sector deleveraging in Europe is also likely impacting trade finance flows to sub-Saharan Africa. A survey carried out in January 2012, shows that some 75 per cent of lenders to the region decreased available credit or liquidity and became more selective with customers.

girungu@ke.nationmedia.com