Capital Markets

Bank loan defaults to hit 17pc by end of year

bank

Customers inside a banking hall in Nairobi. FILE PHOTO | NMG

Global credit ratings agency Fitch Ratings expects bad loans by Kenya’s commercial banks to jump to 17 percent by the end of 2023 due to delayed payments by government contractors and expensive repayment.

In its latest outlook on African banking, the US-based rating agency also expects the new tax measures being implemented by the government to pile pressure on the repayment of personal loans.

Read: Mass default fears as CBK loan rate hits 11-year high

By the end of October, the ratio of non-performing loans (NPLs) to gross loans stood at 15.3 percent compared to 15 percent in September.

A loan is categorised as NPL if it has not been serviced for more than three months.

“We expect the NPL ratio to increase by [one to two percentage points] by end-2023 due to increased debt-servicing costs and delayed repayments by government contractors and parastatals before the trend reverses in 2H24 (Second half of 2024),” said Fitch in its African Banks Outlook for 2024.

Fitch is, however optimistic that Kenyan banks, whose total profit before tax declined marginally to Sh162.3 billion in August 2023 from Sh163.3 billion in the same month last year, have sufficient capital buffers to cushion them against these impairments.

According to Fitch, the increased rates might also result in increased profitability for banks through wide net interest margins. Banks are also expected to benefit from strong fee generation and only moderate operating expenses, explained Fitch.

The National Treasury, in one of its latest reports, admitted there was delayed disbursement of project funds and a shortfall in domestic borrowing which resulted in some items not being funded.

Increased debt-servicing costs have largely been due to the increase in the benchmark lending rate by the Central Bank of Kenya (CBK) which has in turn seen lenders adjusting their interest rates on loans upwards.

On Tuesday the CBK increased the benchmark lending rate, known as the Central Bank Rate (CBR), to levels last seen 11 years ago as it sought to contain the surge in consumer prices and support the battered shilling.

The CBR increase to 12.5 percent from 10.5 percent elevates the risk of default as banks are expected to reprice loans upwards, piling pressure on consumers who are already grappling with the high cost of living.

The increase was despite an earlier warning by the Kenya Bankers Association (KBA) that a higher CBR rate would translate into a build-up of NPLs.

“Retail loans will also be pressured by high-interest rates and a decline in real disposable income following the recent tax hikes,” added Fitch in the outlook dated November 30, 2023.

Read: Kenyans default on Sh596bn as interest rates hit ceiling

The World Bank in one of its reports noted that the ongoing tax reforms, which include doubling the value-added tax (VAT) on fuel from eight to the standard 16 percent, will dampen growth in the near term by eroding the purchasing power of businesses and households.

[email protected]