Treasury counts on Judiciary to unlock bad debts
Posted Wednesday, July 11 2012 at 19:14
The Treasury is banking on the ongoing reforms in the Judiciary to cut bank interest rates through the reduction of lead time in resolving cases of non-performing loans.
Permanent Secretary Joseph Kinyua said expansion of commercial courts will speed up dispute resolution, helping banks to recover their money.
“We are fast-tracking the rollout of commercial courts to help reduce non-performing loans and unlock more money for lending,” said Mr Kinyua on Friday at the Kenya School of Monetary studies.
Mr Kinyua said the Central Bank Rate (CBR) would be relatively fair if adjusted to inflation, adding that there was need to remove factors contributing to bad loans.
“We are setting up 15 commercial courts to speed up dispute-resolution and unlock unpaid funds in court disputes,” said Mr Kinyua.
The chief executive of the Kenyan Bankers Association (KBA), Habil Olaka, said increased incidence of bad loans was forcing the lenders to increase the cost of credit by factoring in the probability of default.
“We expect improvements in delivery of justice to reduce bad loans which banks mitigate by raising the cost of lending and hurting innocent borrowers,” said Mr Olaka.
The World Bank’s Doing Business Report 2011 says despite Kenya’s strong legal framework, there are problems with the length of arbitration and the enforcement of arbitration awards.
“Arbitration takes between one year and seven months on average, from the filing of an application of enforcement to the final writ of execution attaching assets.
“The domestic court process is slow, which can further impede the efficacy of judicial assistance in arbitrations. On average, it takes around 35 weeks to enforce an arbitration award rendered in Kenya,” said the World Bank.
The Central Bank last year raised the base lending rate to 18 per cent in December from five per cent in September in a move to arrest currency volatility after the shilling hit 107 to the dollar from 83 in January.
Commercial banks raised the cost of loans to about 30 per cent from 14 per cent in the same period.
CBK last week cut the rate to 16.5 per cent and banks have begun cutting lending rates. High interest has seen the number of non-performing loans increase forcing higher loan loss provisions.
For instance Barclays Bank saw its bad loans rise from Sh4.2 in March 2011 billion to Sh6.5 billion in March 2012. Its loan loss provisions increased from Sh3.5 billion to Sh5.4 billion in the same period.
Cooperative Bank saw its gross non-performing loans increase to Sh5.6 billion by March 2012 compared to Sh4.9 billion at the same period last year.