The government has started to pursue defaulters over State-backed business loans offered during the past administrations of Jomo Kenyatta, Daniel Arap Moi and Mwai Kibaki, hoping to recover Sh31 billion owed to defunct development finance institutions.
Kenya Development Corporation – the State entity formed through the merger of Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd – has kicked off efforts to recover the bad debts dating as far back as the 1960s.
KDC says it is recruiting debt collectors and auctioneers to pursue assets like land, cars and houses linked to the companies and their directors, who were close to powerful people in the previous regimes.
The State agencies were notorious for lending to cronies of powerful politicians without solid appraisal of the borrowers’ ability to repay, especially under the Moi regime.
“Most of our projects that failed, failed because of [lack of] character and independence,” KDC interim director-general Christopher Huka said in an interview.
“As long as you mix borrowing with a bit of lack of independence from the influence which then kills your objectivity because somebody tells you ‘lend there’ and you don’t follow due process, you will definitely fail.”
ICDC, whose existence dates back to the pre-independence period in 1954, was formed largely to give affordable funds for Kenya’s industrialisation dream as well as sectors with high potential for economic growth through debt and equity.
TFC was established in 1965 to provide affordable long-term development funding and advisory services for investment in the tourism industry, while IDB Capital came into existence in 1973 to help mid-and large-sized businesses establish and expand through competitive funding.
However, the three State-owned development finance institutions have over the years been associated with plunder of public resources, partly through influence from powerful forces within government circles.
Mr Huka said the principal loan makes up Sh4.1 billion, or 13.2 percent, of the Sh31 billion total non-performing debts being pursued, with some bad loans more than three times the borrowed amount.
This goes against the ‘in duplum’ rule in banking where lenders should cease charging interest on defaulted loans once it matches the principal amount.
The continued accumulation of interest and penalties on bad loans taken as far as the late 1960s is a pointer to possible negligence by officials in the defunct development finance institutions, which merged into KDC.
“If the penalties and interest grow up to the principal amount, ideally you are supposed to stop (more charges) but it has not been done. That’s part of the clean-up (of the balance sheet) that we are doing,” Mr Huka said. “It [clean-up] is our priority because we want to attract investors as the first thing they look at is your books.”
KDC said the debt recovery process entails separating bad loans whose accrued interest and penalties have surpassed the amount borrowed, seeking approval from the board and the Treasury to write them off and hiring debt collectors to recover the funds.
Bad loans taken from the 1960s to 1990s — where there’s a high chance cumulative arrears have surpassed the principal — will form the first batch of bad debt, while those from the 2000s will be placed in a separate tranche.
KDC will further map collateral like land used to secure the bad loans, which can be sold to recover the funds and identify assets owned by firms and individuals who have defaulted.
“When we write off the bad loans from our balance sheet, it doesn’t mean we will forget about that. We will create an SPV [special purpose vehicle] with a team focusing on the collection of the same,” Mr Huka said.
The firm is evaluating bids from debt collectors who responded to its recent call. Three successful debt collectors will be hired.
KDC will also be looking at debt collectors which can buy off the bad loans and pursue the defaulters for payment besides hiring turnaround professionals to try and salvage struggling and collapsed firms where the defunct development financiers had acquired stakes.
“We have that three-pronged approach to deal with it. I believe it can be done. It’s only that we have not given it full focus before,” Mr Huka said.