Capital Markets

CBK warns of supplier loan defaults spike after polls

njoroge

Central Bank of Kenya Governor Patrick Njoroge. PHOTO | SALATON NJAU | NMG

The Central Bank of Kenya (CBK) has warned that regime changes at both national and county levels could delay payments of pending bills for supplies or works delivered, leading to an increase in bad loans for lenders with outstanding loans.

Pending bills have continued to rise despite a three-year-old circular by Treasury secretary Ukur Yatani directing ministries, parastatals, and counties to prioritise payment of verified arrears in their budgets.

The CBK now fears payment of the bills could be complicated by the political transition, affecting the mountain of bad debt held by financiers and affecting their asset quality.

“Political risks associated with the 2022 General Election could impact the economy and in turn banks’ asset quality. Regime changes at both national and county levels could delay payments of pending bills for supplies or works delivered, leading to an increase in NPLs for those with outstanding loans,” said the CBK in its latest Kenya Financial Stability Report July 2022 published recently.

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“It could also affect other sectors like real estate and building and construction sectors due to low uptake.”

Kenyans voted Tuesday in crucial elections as outgoing President Uhuru Kenyatta prepares to hand over power to a new leader.

Even though the focus is mostly on the high-profile presidential contest pitting veteran opposition leader Raila Odinga and outgoing Deputy President William Ruto, across the 47 counties, Kenyans cast votes for governors, Parliament representatives and other lower-level positions.

Government suppliers revealed recently they plan to file a class action suit over arrears owed by parastatals, ministries, counties, and other State agencies, which form the bulk of the country’s more than Sh574 billion pending bills.

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Association of Public Sector General Suppliers (APSGS) said recently it would seek a legal interpretation on how the mounting pending bills would be paid by the national government and county authorities, which will take power after the August 9 General Election.

“The biggest worry is that most of the new governments are afraid of paying the old bills when they come into the office. This is because of obvious fears like there might have been corruption and this creates a problem for them or if they pay, they may not have money for their own projects,” APSGS secretary-general Simon Gichuki told the Business Daily earlier.

“What we are seeking is a structure of protecting suppliers in this country because as a supplier you’re always at the mercy of the outgoing and incoming government. We have been christened as the most corrupt and that is a sad thing.”

Latest Treasury statistics, for example, show pending bills at the national level, largely by parastatals including public universities, jumped to Sh434.5 billion in March 2022 from 307.8 billion a year earlier.

The unsettled obligations include payments to contractors of State projects, suppliers of goods and services as well as unremitted statutory deductions such as payroll taxes, pension, and medical cover contributions.

Loan defaults increased for the fifth consecutive month to hit a record Sh483 billion in May amid a stressed economy that has made it harder for individuals and businesses to service their loans.

Data from the CBK shows that non-performing loans have been on the rise since December last year when they stood at Sh426 billion.

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The bad loans book has since shot up to Sh483.8 billion in May, signalling tougher economic conditions for borrowers in key sectors of the economy amid high inflation.

Banks have been facing ever-rising loan defaults, after the onset of the Covid-19 pandemic in March 2020 which affected millions of households as their incomes dropped and businesses ground to a halt.

Households and businesses across the country are currently reeling from the effects of high inflation, which has lowered demand for goods and services as their prices increasingly get out of reach for many consumers.

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