Job cuts double workers’ loan defaults to Sh52bn

Personal loan defaults have nearly doubled over the past three years to Sh52.3 billion in a period when Kenya’s economy has resulted in job cuts and near stagnant wages, leaving thousands of people in a debt trap.

The latest Central Bank of Kenya (CBK) data shows that defaults from personal unsecured lending jumped Sh3.6 billion in the three months to June, the biggest increase when compared to other segments like mortgages, trade and manufacturing.

Thousands of workers have taken out a combined Sh712 billion in loans, mostly without collateral, for short-term needs like buying furniture, vehicles and urgent family expenses like healthcare.

The mounting defaults are a reflection of the struggles that borrowers are facing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as firms intensify austerity measures to protect their profits.

This has seen workers who had taken loans on the strength of their pay slips end up defaulting as they struggle to secure new jobs as companies freeze hiring plans.

The Sh3.6 billion jump on personal loan defaults is higher compared to a Sh1.5 billion rise in the trade segment and drops of Sh1 billion and Sh100 million in manufacturing and mortgage defaults respectively.

Ken Gichinga, the chief economist at Mentoria Economics, said that reduced cash flow in the economy has hurt companies’ sales, triggering job cuts that ultimately led to a rise in personal loan defaults.

"Many of the people who lost jobs had running loan facilities. Losing jobs with no available opportunities disrupted their income streams and defaults followed," said Mr Gichinga. "It is a case of a weak economy becoming weaker. Companies are not selling as much as they used to before and they therefore do not require additional workforce."

While the Kenyan economy expanded 6.3 percent in 2018 from 4.8 percent in 2017, private sector activity — which translates to jobs and higher pay — has remained muted. The 2019 full year growth numbers are yet to be released.

"If you look at the employment index (in the PMI) since the beginning of 2017, it’s been quite neutral, meaning it’s not like there has been improvement in new jobs," said Jibran Qureishi, the regional economist for East Africa at Stanbic Bank #ticker:CFC — which tracks companies’ performance monthly through the Purchasing Managers’ Index (PMI).

Jobs creation

Economic Survey 2019 data shows that 78,400 new formal jobs were created in the economy in 2018 compared to 114,400 in 2017. This is the slowest pace of formal job growth since 2012 when the economy churned out 75,000, adding to the crisis of youth unemployment. The data does not capture job cuts and net employment, which have a bearing on loan repayments by salaried staff.

Defaults in the banking sector increased to Sh5.6 billion in the three months to June, with the personal loan segment alone accounting for 64.2 percent of the bad loans. A significant share of the personal lending is unsecured, making it difficult for banks to pursue other recoveries like property auction.

The higher non-performing digital loans have triggered the increase in the number of defaulters reported to one of Kenya’s three credit reference bureaus (CRBs), hurting the borrowers’ chances of being able to borrow more.

In the last three years, 2.7 million people, in a population of 45 million, have been negatively listed with CRBs, according to official data.

A 2019 survey by Financial Sector Deepening (FSD) showed that more than half (51 percent) of Kenyans reported a worsened financial status, with many battling excess debt from multiple sources, especially the mobile lending apps.

FSD further said that more than half of borrowers had sold assets, borrowed or cut back on expenses to repay loans while a quarter were using over half of their monthly income to service loans.

Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures by aggressive lenders. This is reflected in default rates of other loan segments such as mortgages, which had the highest rise in bad loans in 2018.

About 16.9 percent of the Sh224.8 billion gross loans extended as mortgages were not being serviced at the end of December 2018, up from 12.2 percent in 2017.

The latest CBK data shows that bad loans in the real estate sector dropped by Sh100 million in the three months to June.

Auctioneers say that they held more auctions in 2019 and 2018 compared to 2017. These were linked to mortgage defaults as banks were moving much faster to seize properties from defaulters.

"There was a glut of repossessed homes and office blocks," said Joseph Gikonyo, the managing director of Garam Auctioneers. "The bad economic environment has made it difficult to get buyers even for property being put up for auction."