Banks cut lending as defaults increase to Sh586 billion


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Commercial banks’ loan book has shrunk for the first time in 20 months, pointing to slowed issuance of new loans as defaults rose to Sh586.2 billion at the end of July.

Central Bank of Kenya (CBK) data shows gross loan book slowed to Sh3.975 trillion in July from Sh3.98 trillion in the previous month to mark the first month-on-month decline in the loan book since December 2021.

Private sector credit growth eased for the third straight month to 10.3 percent in July, the slowest in 17 months since 9.2 percent in February 2022.

The drop in the loan book means repayments have been more than the new loan being issued, coming in the period lenders are grappling with mounting defaults.

Banks have been increasing their attention to government papers given the sustained rise in the yields on T-bonds and T-bills.

Gross non-performing loans—number of loans on which interest and principal has not been paid for at least three months— hit Sh586.2 billion in July, being a Sh10.1 billion jump from the previous month.

Lenders had endured a rise in defaults for five consecutive months to May when the figure peaked at Sh592.6 billion before cooling to Sh576.1 in June.

At Sh586.2 billion, borrowers have defaulted on 14.7 percent of the Sh3.975 trillion that banks had issued out as loans by the end of July.

Lenders have reacted by increasing the provisioning for loan defaults in an economy where a rise in interest rates and increased State deductions have negatively impacted borrowers’ ability to service loans.

Bank’s weighted average interest rates have been rising over time to hit 13.5 percent in July— the highest since March 2018 when the figure was at 13.49 percent.

Increased interest rates have meant more interest income. However, increased provisioning for defaults has translated into higher operating expenses.

This has impacted banks’ profitability, with the seven-month pre-tax earnings hitting Sh142 billion— being a rare drop from Sh142.3 billion in a similar period last year.

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