Drought-hit Marsabit, Garissa, Samburu and Isiolo counties have the highest proportion of borrowers defaulting on credit, including dues owed to shopkeepers and shylocks.
The rates of default in the four counties ranged between 47 per cent and 74 per cent and more than double the national average of 24 per cent, a survey part-conducted by the Central Bank of Kenya (CBK).
Busia, Nandi, Siaya and Nairobi had the lowest default levels in findings that look to influence lending patterns by banks and digital lenders across Kenya’s 47 counties.
Northern Kenya counties have been the worst hit by drought in the past two years, which has hurt households that depend on livestock as their main source of income.
The findings of the household survey by the CBK, FSD Kenya and the Kenya National Bureau of Statistics (KNBS) show that 50.9 per cent of the respondents with credit defaulted on mobile loans last year.
Consumers also defaulted on credit chalked up from neighbourhood shopkeepers and shylocks as well as family and friends despite the rapid growth of the banking industry, whose default levels stood at 14 per cent of the borrowed loans.
About 41.8 per cent of those owing friends and family defaulted, with 40.6 per cent and 31.3 per cent owing shopkeepers and shylocks unable to clear their debts.
The four counties are among the 11 identified by the National Drought Management Authority as suffering from acute drought and severe vegetation deficit, which has hit livestock farmers.
The others are Kajiado, Kitui, Mandera, Laikipia, Tana River, Turkana and Wajir.
“Marsabit, Garissa and Samburu counties recorded the highest level of debt distress proxied by default rates of 74 per cent, 50 per cent and 58 per cent among the adult population, respectively. This may be explained by the climate-related shock of drought facing these counties that have reduced the ability of borrowers to repay their loans,” the survey states.
“Busia, Nandi and Siaya recorded the lowest incidence of loan defaults, all recording below five per cent among the adult population of reported loan defaults.”
The survey defines a loan default as including missing a scheduled repayment, paying late and not making any payment at all.
The bulk of the defaults is linked to mobile loans, being the most preferred lending in the counties that have few brick-and-mortar banking facilities.
Marsabit, for instance, had only four commercial banks — running six branches — with just 5.4 per cent of the population using formal banking services and 2.8 per cent accessing SACCOs.
Access to mobile money services stood at 77.8 per cent.
Knowledge of the cost of borrowing, a key factor in the choice of a lender, is also relatively low in the county at 29.8 per cent, meaning that borrowers in the area are likely to fall prey to predatory lending practices that have been blamed on unregulated mobile lenders.
In Garissa and Samburu, just 0.3 per cent and 17.2 per cent of the residents use banking services respectively, while 60.7 per cent and 62.9 per cent use mobile money services.
Mobile banking and digital loans are issued without collateral, making them vulnerable to default by borrowers. They are also often taken as an emergency measure by cash-strapped individuals or enterprises, hence the higher risk of default.
Many Kenyans now find they can get loans in minutes, with banks relying heavily on algorithms that build a financial profile of customers in the quest to minimise the risk of default.
The defaults also emerge in a period when the State is racing to tackle a heavy debt burden, reduced cash flow, surging cost of living and drought.
Costly commodities have hit workers hard given that the average real wages, adjusted for inflation, stood at negative 3.83 per cent last year compared to negative 0.59 per cent in 2020.
Employers say the real wages will take longer to improve amid the recovery of the economy from Covid-19 economic hardships, which delivered layoffs, pay cuts and business closures.
This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships.
The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited (EABL) and Safaricom.