Loan defaults have hit levels last seen 16 years ago as aggressive interest rate rises piled pressure on borrowers, adding auctions and blacklisting to the growing list of afflictions that hit households and businesses this year.
Banks have found themselves in not so familiar territory: Discussing a drop in profits as mounting loan defaults and deteriorating economic conditions of their customers forced them to set aside additional money to prepare for even more defaults.
It has been the year where newspapers have been replete with auction advertisements as individuals and companies struggled to keep up with loan repayments, forcing them to dispose of their assets such as houses and cars for a song.
Top banks including KCB, Co-operative Bank of Kenya, Stanbic Bank and NCBA have in particular been auctioning motor vehicles whose auction prices have proved very attractive considering that the shilling has this year shed a quarter of its value against the dollar and made imports of used cars more expensive.
Co-op Bank on Wednesday last week (December 20), put on auction 69 vehicles valued at a reserve price of Sh185.34 million, asking interested buyers to bid by January 10.
The Sh185.34 million guide price means the cars on sale have a market price worth more than Sh247 million given that auctions are by law allowed to pick a reserve price that is 25 percent below the market value.
It has been a year when repossessed properties have been taken to auction yards in droves. But seekers have not been buying in spades, making auction yards to fill up and putting to test the patience of auctioneers and banks.
“The market is worsening everyday as far as I am concerned. It is not improving. If anything, it was possible to sell a property at say Sh10 million four years ago compared to today in most areas,” says Joseph Gikonyo, the proprietor and manager at Garam Investments.
Yet banks, hit with the rising loan defaults, have had to for borrowers, some losing their matrimonial homes in the process while others losing properties inherited from their parents as courts failed to admit sentimental attachment as a reason enough to stop banks from selling defaulters’ properties.
Central Bank of Kenya (CBK) data shows gross non-performing loans (NPLs)—amount of loans on which interest and principal has not been paid for at least three months— had hit Sh615.54 billion at the end of September, marking three straight months of increasing defaults.
The Sh615.5 billion defaults against a loan book of Sh4.103 trillion at the end of September means the NPL ratio is at 15 percent—being closer to that of 15.4 percent that the sector posted in June 2007.
The NPL ratio deteriorated to 15.3 percent in October, pointing to the continued loan defaults that have forced lenders to set aside more money in anticipation of increased defaults.
Garam Investments Auctioneers, one of the largest auctioning firms in the country, has this December scheduled an auction of various properties including houses, offices and land valued at over Sh8 billion, giving a glimpse into the economic hardships that continue to batter borrowers.
Garam’s list includes over 90 residential houses costing millions of shillings, pointing to depressed homeowners.
Some borrowers like Rahab Waithera Mugo have been unlucky, losing their matrimonial homes to banks as courts struck out pleas that they be granted more time to service loans since they have sentimental attachment to their properties.
Ms Mugo in October failed to stop Equity Bank of Kenya from auctioning her piece of land in Eldoret after defaulting on a Sh9 million loan that required her to be parting with Sh134,380 every month.
“The fact that a property is matrimonial in nature or has a sentimental value does not stop it from being auctioned as long as the requisite procedures have been followed according to the law. When charging such property, the borrower is fully aware of the consequences of default,” the court said.
A similar fate befell Karrymart supermarket business owner George Kariithi who failed to stop the auction of his parcel of land over a Sh107.3 million loan owed to Co-op Bank.
Mr Kariithi had used 12 pieces of land in Ngong, one in Naivasha and another one in Limuru as collateral. The court dismissed his push to stop the auction of Sh45 million Naivasha property, on grounds that the land in question is of “greatest sentimental value” to him since both his parents are buried there.
“As long as the first plaintiff (Karrymart) is indebted, the bank is entitled to choose which security or combination of securities it should realise,” the court ruled.
Some banks have also been calling on distressed customers to help get the best possible price in the market, through an arrangement called a private treaty.
Under private treaty, distressed borrowers agree with the bank to look for the best available price for their properties and sell to pay loans as opposed to relying on auctioneers’ hammer.
Banks, in the nine months ended September, posted a 4.9 percent decline in pre-tax profit to Sh177.8 billion as loan defaults soared to levels last seen 16 years ago.
The decline in profit marked a rarity for the sector that has generally been growing profits. The only recent years in which the sector’s profit dipped was in 2017 on the impact of interest rate capping law and in 2020 when Covid-19 disrupted businesses.
“2023 was a defining year as it tested our resilience to be able to adequately sustain our commitments to both our customers and shareholders, in the wake of a difficult business operating environment. Our focus was on delivering value and supporting customers to help them navigate the tough economic environment,” said Paul Russo, the chief executive of KCB Group.
Factors such as elevated price of goods and services, new statutory deductions such as housing levy and increased interest rates in line with a higher central bank rate (CBR) —now at 12.5 percent, the highest point in 11 years—have combined to weaken borrowers’ ability to service loans.
Borrowers have this year been hit with three rises in the central bank rate, which usually signals how banks price loans.
The Monetary Policy Committee (MPC) on December 5, served one of the biggest surprises by raising the CBR to 12.5 percent from 10.5 percent, being the highest since September 5, 2012 when the rate was at 13 percent.
The new rate has ushered in a fresh round of upward repricing of loans, giving borrowers a new pain point as they bid farewell to 2023.
The hike was the fastest since November 1, 2011 when CBK surprised the market with a 5.5 percentage point rise from 11 percent to 16.5 percent.
Borrowers are already grappling with high cost of living and reduced earnings in a year that saw the government hit salaried Kenyans with a 1.5 percent Housing Levy on their gross pay and also increased mandatory contributions towards pension from Sh200 to a maximum of Sh1,080 per month currently.
The mounting auctions in the property market have offered a reflection of the struggles that borrowers have been going through in an economy that has also witnessed a string of job losses and stagnant salaries amid elevated cost of living and new or enhanced State deductions.
Bankers, through their lobby, Kenya Bankers Association (KBA) were unsuccessful in convincing the CBK not to raise CBR since they feared that such a move would lead to mass defaults among borrowers given the situation in the economy.
