Capital Markets

Kenya slides in credit default rules enforcement survey

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The Central bank of Kenya, Nairobi on Tuesday, January 5, 2021. PHOTO | DENNIS ONSONGO | NMG

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Summary

  • Kenya's failure to enforce rules to reduce credit default risks locking out local and foreign investors in the financial market and reduce the country’s attractiveness for investment, a report has shown.
  • The Absa Africa Financial Markets Index 2021 shows Kenya lost 29 points in an index that measures enforcement of rules that reduce defaults for commercial and investment banks, scoring 28 out of 100.
  • The drop saw the country slip four places in the Africa financial market attractiveness survey—to 11th spot from seventh in 2020.

Kenya's failure to enforce rules to reduce credit default risks locking out local and foreign investors in the financial market and reduce the country’s attractiveness for investment, a report has shown.

The Absa Africa Financial Markets Index 2021 shows Kenya lost 29 points in an index that measures enforcement of rules that reduce defaults for commercial and investment banks, scoring 28 out of 100.

The drop saw the country slip four places in the Africa financial market attractiveness survey—to 11th spot from seventh in 2020.

The measure looks at enforceability of standard financial markets master agreements that help cut risks and create a better investment environment for investors.

“Regulatory frameworks need to be in place to ensure the enforceability of contracts and continuity of transactions in the face of uncertainty,’’ the report stated.

“It ensures that commercial transactions continue to be viable notwithstanding default due to adverse economic and market conditions or unforeseen circumstances that can be treated as force majeure, such as the pandemic. Close-out netting reduces credit exposures and credit shortfalls for commercial banks and capital market intermediaries.”

Enforcing the rules reduces defaults for local banks and in derivatives markets ensures availability of capital for customers, improves liquidity to ensuring financial instability.

The rules also ensure that foreign exchange reserve, interest rates and exchange rate which affect commodity prices are well maintained, to protect exporters from financial losses.

The report shows Kenya, among other countries like Tanzania, Ethiopia, and Rwanda are yet to make progress with enforcing the rules.

Ghana, Nigeria and South Africa performed better on this measure.

Last year, banks recorded high non-performing loans after issuing interest payment holidays due to subdued business.