Loan defaults hit 18-year high on soaring interest rates

The Central Bank of Kenya in Nairobi County on January 28, 2024. 

Photo credit: File | Dennis Onsongo | Nation Media Group

Kenyans had defaulted on more than Sh630 billion loans in April 2024, the highest level in 18 years, as borrowers reacted to a high-interest rate regime that has stifled the ability of millions to make timely repayments.

Data released by the Central Bank of Kenya (CBK) on Wednesday showed that the gross non-performing loans as a ratio of total advanced loans soared to 16.1 percent by April, up from 15.5 percent in February.

This is the highest non-performing loans ratio since May 2006 and is set to force banks to make huge provisions for bad debts and usher in another season of painful auctions.

The increasing bad loans are spread out in sectors, including households, real estate and trade as the sharper borrowing costs prove disruptive across the entire spectrum of the economy.

“Increases in NPLs were noted in agriculture, real estate, tourism, restaurants and hotels, trade and building and construction sectors,” the CBK said on Wednesday after the Monetary Policy Committee (MPC) meeting that retained its benchmark rate at 13 percent, signalling brakes on further increases on the cost of loans.

Commercial banks have continued passing on higher credit costs to customers since the start of 2024 after signalling by the CBK that raised the benchmark interest rate in December and February respectively.

For instance, KCB raised its base lending rate to 15.6 percent in May from 14.7 percent in January while Equity Bank raised borrowing costs in February, setting interest rates up by up to 26.74 percent for its riskiest customers.

Last week, the Kenya Bankers Association, the sector lobby, highlighted the implications of costlier credit on NPLs even as they noted measures to contain the asset quality deterioration, including the tightening of credit standards to include the demand for higher value collateral.

“Credit lending interest rates have risen in tandem with the tightened monetary policy conditions as reflected in the elevated Central Bank Rate. Subsequent to the rise in NPLs, banks continue to make adequate provisions for expected credit losses and tightened credit standards to avert a build-up in non-performing loans going forward, the KBA said in a note.

Growth in private sector credit has slowed down significantly amid the higher defaults with the fresh CBK data placing the expansion at 6.6 percent in April, compared to 7.9 percent in March, marking consecutive months of single-digit credit growth to the sector in 2024.

According to Kenneth Minjire, a senior associate for debt and equity at AIB-AXYs Africa, a stock brokerage, the rise in NPLs is a reflection of the state of the economy and the impact of the accompanying high borrowing costs.

“The rise in non-performing loans is expected given the current business environment and with basically every bank adjusting their interest rates to 20 percent and above. Sometimes the government might paint a rosy picture but the NPL ratio gives the true pulse of the economy,” he said.

Loan defaults are likely to remain elevated with the CBK having retained its benchmark lending rate at 13 percent on Wednesday as the apex bank noted difficulties in adopting a more accommodative interest rate in the face of underlying inflationary and currency pressures.

“The Committee (Monetary Policy Committee) noted that core inflation has remained sticky in recent months and that interest rates in major economies are expected to remain higher for longer due to the stickiness of inflation,” the CBK added.

Borrowers are expected to continue facing higher interest costs with the retention of the benchmark lending rate as commercial banks follow the signalling of the regulator.

Commercial banks have warned of even higher interest rates on loans from the adoption of new tax measures that touch on the provision of financial services.

“Going forward, there are upside risks to the cost of financial services with the proposal to increase excise duty from 15 to 20 percent and the introduction of 16 percent VAT on financial services from July 1, 2024. This, in an environment of high interest rates, may exert extra strain on customers and potentially exacerbate their difficulties in servicing existing facilities,” the KBA added.

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