Columnists

Why credit risk remains key concern in Kenyan markets

tuskys

Closed Tuskys Wareng branch. FILE PHOTO | NMG

We have been exposed to many different types of risks in Kenya on both a personal and business level. But, how do we explain the universe of risk types and risk factors in an organised way?

In early 2020, many large hotels either faced imminent closure or were altogether closed due to debt they owed to financial institutions. For example, Mayfair hotel closed with an undisclosed amount of debt, while Jacaranda hotel faced looming closure due to a Sh253 million debt it owed to Guaranty Trust Bank, and other trustees and capital structure expenses heightened the risk for creditors and investors alike. These two particular hotels and many others had one thing in common; they were subject to a credit event.

Mumias Sugar, Nakumatt, and Uchumi are some of the most celebrated cases of credit risk in the manufacturing and supermarket industries in Kenya.

Mumias Sugar owed close to Sh20 billion in 2018 to sugarcane farmers, banks, employees, and to Kenya Revenue Authority (KRA). Consequently, the company’s fortunes at the Nairobi Securities Exchange(NSE) declined precipitously and was unable to raise funds in the capital markets. The government has on numerous occasions provided financial rescue packages to the company without success. Mumias sugar company is currently tittering toward total collapse.

Nakumatt Holdings, a supermarket, owed Sh30 billion to 10 banks and suppliers in 2017. Nakumatt was unable to repay its debt. Nakumatt’s management disclosed its true financial position to the government and sought its intervention to regain stability, but was denied.

Uchumi, the iconic Kenyan brand supermarket today owes in excess of Sh4.7 billion to banks and suppliers, while Tuskys, a private supermarket is heavily weighed down by debt owed to banks and suppliers in excess of Sh6.2 billion.

Kenya has regulated and unregulated intermediaries that are involved in the credit markets. Among many others, these entities include banks, Savings and Credit Cooperative Societies (Saccos), microfinance institutions, risk funds, investment groups, savings groups, financial service associations, and development finance institutions. The informal credit market consists of family and friends, “loan sharks” and others.

Kenya has an assortment of government regulators that exist to oversee both the stability of the intermediaries and the safety of both borrowers and savers.

Prudential (stability) and market conduct (safety) regulation and enforcement are at various levels of maturity in the family of regulators. This sometimes leads to inconsistency in the consequences of breaches by the financial sector. For example, the lack of uniformity in regulation leads some financial intermediaries in certain cases to push the envelope of acceptable practice in their various offered financial products.

If we look into the future, then we can see that sophisticated risk management functions are proactively evolving to reduce the impact of potential future credit crises. That said, there is an increasingly uncertain future in Kenya with lenders, borrowers, and moratoria engaged in an uneasy three-way dance. Moreover, a deeper examination of the sources of risks in locally-based organisations reveals an unhealthy level of both internally and externally induced risks.

loan payment

In response to the pandemic, a majority of borrowers across the country were given more time to repay their loans with the help of government-support guidelines issued by the Central Bank of Kenya (CBK).

If government-support programmes for borrowers are phased out too quickly then non-performing loans and defaults will likely significantly increase in 2021.

The effects that these loan payment postponements will have on debtors and borrowers are uncertain. For example, how will the expiration of government guidelines impact lenders’ exposures and expected credit loss projections under IFRS 9?

Dr. Mark Is a managing partner at Black Diamond Risk Enterprises and Mr Kingori is the founder of Fincap Risk Advisors.