Firms and individuals who tapped dollar-denominated loans have been offering banks repayments in local currency and effectively defaulting as they struggle to access dollars, pointing to a persisting foreign exchange (FX) market dysfunction.
The Treasury disclosures to the International Monetary Fund (IMF) show borrowers in sectors such as real estate, transport and communication, and building and construction as well as individuals have been the most hit since they have no other means of accumulating dollars as is the case with exporters.
IMF says by offering commercial banks repayment in Kenya shilling, such borrowers have been technically defaulting on their loans, contributing to the rising stock of non-performing loans (NPLs).
“Banks report that with the ongoing dollar shortage, FX borrowers who are unable to source US dollars in the local market have been offering repayment in shilling, effectively defaulting on the loans, and contributing to the recent rise in NPLs.
Central Bank of Kenya data shows gross NPLs—the amount of loans on which interest and principal have 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 Sh615.54 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
Lenders told the IMF that a significant portion of the FX loans are in sectors such as personal loans, real estate, transport and communication, and building and construction, and it is unclear to what extent borrowers in these sectors have a natural hedge as these sectors are not main export sectors.
“Banks are also exposed to interest rate and FX risks from the rising interest rates and exchange rate depreciation pressures,” says the IMF.
The continued challenge in accessing dollars by those in need has come amid the admission by the Treasury to the IMF that the oil supply deal Kenya signed with three State-owned Gulf companies last year to tackle challenges related to the scarcity of dollars has failed to ease the FX pressures.
The Treasury has told the IMF that it intends to exit the oil import arrangement because it is “cognizant of the distortions” the deal has created in the FX market.
IMF says the share of FX liabilities for Kenya stood at 34.9 percent at the end of the third quarter of last year, being higher than the median of 31.6 percent for emerging and developing economies for which data is available.
