Kenyan banks could cushion clients from costly loans to avert defaults
What you need to know:
Kenya Bankers Association says cushioning borrowers will be necessary should the current slide in the value of the local currency persist, despite the monetary policy actions by the Central Bank of Kenya.
Kenyan lenders expect an increase in the level of NPLs in tourism, personal/household, transport and communication and real estate sectors in the second quarter of this year, due to the existing wave of insecurity in the country, negative travel advisories and heightened political tensions.
The economists are also concerned about Kenya’s ability to repay loans borrowed offshore as its local currency weakens against the dollar, making it expensive to service external debt obligations denominated in foreign currencies.
Kenyan banks are considering protecting borrowers from high interest rates in a bid to avert mass defaults, with economists warning of a further increase in the cost of borrowing. This is aimed at saving the shilling from depreciating further against the dollar.
The industry lobby group Kenya Bankers Association said cushioning borrowers will be necessary should the current slide in the value of the local currency persist, despite the monetary policy actions by the Central Bank of Kenya.
The Kenya Banks' Reference Rate has gone up by 1.33 percentage points from the 8.54 set in January.
In Uganda, the central bank recently raised its policy rate to 13 per cent, from 12 per cent, in a bid to stop the depreciation of the local currency, which has lost about 27 per cent of its value since January.
Last week, Bank of Uganda Governor Prof Emmanuel Tumusiime-Mutebile said the banking regulator will no longer inject dollars into the currency markets because it is not sustainable.
He said that an attempt to prop up the exchange rate at levels that are not consistent with supply and demand in the foreign exchange market by intervening and selling foreign currency is not sustainable.
Amish Gupta, a director of investment banking at Kenya’s Standard Investment Bank, supports this view.
“Time and time it has been proven that trying to protect the value of the currency is a wrong strategy as the forces of supply and demand should be left to determine this value,” said Gupta.
The measures taken so far by Kenya’s Monetary Policy Committee include addressing macroeconomic volatility, according KBA’s chief executive Habil Olaka.
“If this volatility persists despite the CBK’s measures — leading to further increases in interest rates — cushioning borrowers will be hard,” he said.
Mr Olaka did not specify what actions are likely to be taken. However, in October 2011, following a series of increases in the central bank’s benchmark lending rate to a high of 18 per cent, as the shilling slipped to a low of 107 against the dollar, Kenyan banks capped additional rises in monthly loan instalments to 20 per cent of the existing ones and waived penalties on early loan repayments.
As a result, gross loans and advances in the banking industry grew 4.2 per cent from Ksh1.19 trillion ($11.65 billion) in December 2011, to Ksh1.24 trillion ($12.14 billion) in March 2012, according to data from CBK.
A huge chunk of the loans — amounting to Ksh321.8 billion ($3.15 billion) — were extended to households and individuals up from Ksh318.8 billion ($3.12 billion) in December 2011. It was followed by the trade segment which procured loans amounting to Ksh242.7 billion ($2.37 billion) compared with Ksh232.7 billion ($2.79 billion) in the period under review.
Manufacturers secured loans totalling Ksh169.1 billion ($1.65 billion) compared with Ksh156.7 billion ($1.53 billion) in December of 2011.
