Capital Markets

Bad loans tipped to rise on tax-linked slowdown


Loans tapped from the International Monetary Fund (IMF) have tripled to Sh335.5 billion. FILE PHOTO | POOL

Non-performing loans (NPLs) are expected to soar on a tax-induced economic slowdown as recent tax measures take a toll.

Analysts say the implementation of new tax measures will likely depress consumer incomes, triggering discretionary spending while hitting their ability to meet expenses including the servicing of loans.

Reduced consumer spending sets up businesses, particularly small and medium enterprises, for lower sales volumes, impacting the ability to meet loan repayments.

Read: Bad loan woes return to haunt Tier-one lenders

“There is going to be much more to come (in asset quality deterioration). It’s all in the lack of economic activity. I have been here for a week and I can tell you Nairobi is not buzzing,” Kato Mukuru, the head of frontier research at EFG Hermes told the Business Daily.

“I understand the idea behind tax increases is to increase tax revenues, but this is comparable to whipping a dead horse. It is not the right time to do it. I think if economic activity does not return, we could easily add another three to five percentage points to the NPL ratio.”

The ratio of gross non-performing loans remained elevated at 14.5 percent at the end of June having eased slightly from 14.9 percent.

According to data from the Central Bank of Kenya (CBK), loan recoveries have been noted in transport and communication, agriculture, manufacturing, personal and household sectors.

Read: Industrial sector tops bad loans growth list

The average commercial bank lending rate for instance raced to a 65-month high of 13.5 percent in July.

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