The stock of bad loans held by commercial banks grew Sh66 billion in the nine months to end of September 2018, indicating the persistence of a challenging business environment that has seen many small businesses and households default.
The latest banking sector data for first nine months of the year shows that non-performing loans rose to Sh326 billion from Sh260 billion in a similar period last year, driven by heavy defaults from small businesses and the taxi sector.
Thousands of taxi operators linked to digital taxi-hailing platforms, who procured loans to buy cars, have defaulted, prompting banks to send in auctioneers. Nairobi-based auctioneer Stephen Kangethe of Dalali Traders told the Business Daily that scarcity of cash in the economy has also left the auctioneers struggling to sell repossessed items such as property and vehicles that come with relatively high reserve prices.
“The most common loan defaulters are taxi operators who procured loans to buy cars. Small businesses such as stalls are also defaulting a lot, and some are not able to raise their rent let alone service loans,” said Mr Kangethe.
The rise in bad loans continued despite recent release of official data showing that the economy grew by six per cent in the first half of the year, affirming the belief that heavy public spending on infrastructure is driving the growth.
Kenya’s economy has since 2013 grown at an average of 5.6 per cent per annum but this has been overshadowed by a steady fall in corporate profits, a stagnation of workers’ incomes and a series of corporate retrenchments that have slowed down small businesses and hit households hard.
Banks have responded to this rise in the risk profile of borrowers by diverting money to government securities even as they blame the capping of interest rates for their reluctance to lend to the private sector, especially SMEs.
Mr Kangethe noted that potential defaulters would previously get second or third loans to repay due debt and stave off auctioneers, but with the advent of listings on credit reference bureaus this window has closed.
The ranks of personal loan defaulters are mainly made of formal sector workers who lost their jobs in the wave of retrenchments in the past four years, and the number is expected to keep rising as companies turn to staff cuts in an effort to reduce costs and retain profitability.
The Central Bank of Kenya (CBK) in its October report put the ratio of non-performing loans to gross loans at 12.3 per cent, having fallen from 12.7 per cent in August, but considerably higher than September 2017's 10.4 per cent. The CBK says trade, household and personal sectors carry the most default, noting that this is where banks have intensified their recovery efforts.
“The fall (between August and October 2018) was largely due to declines in NPLs in the trade, personal and household sectors…mainly due to sustained recovery efforts,” said the CBK in a statement after last week’s Monetary Policy Committee (MPC) meeting.
The rise in non-performing loans has led to risk aversion among banks, which grew their loan books at just 2.7 per cent in the one year to September to Sh2.47 trillion. At least 15 out of the 40 lenders reported a fall in their loans to customers, including tier one lenders Co-operative Bank and Standard Chartered.
Customer deposits grew 12 per cent to Sh3.46 trillion during the same period.
Banks reacted to the high risk of private sector and household loans default by lending more to the government — a move that has saw their holdings of government securities rise 15 per cent or Sh153 billion to Sh1.17 trillion by the end of September.
This strategy has helped the sector keep growing its bottom line as was the case in the first nine months of the year when collective net earnings rose 13.5 per cent or Sh10.5 billion to Sh87.8 billion compared to a similar period last year.
While the lenders have been able to find a way around the tough economic climate, businesses have found the going tough, with many also being hamstrung by delayed government payments to contractors and suppliers that have hampered the flow of cash through the economy.
Private sector players polled by the CBK last month, however, expressed optimism that increased spending on the Big Four priority sectors by the government could lead to an improvement of the business environment.