One in five Kenyans trapped by bank loans

Financial Sector Deepening
The Financial Sector Deepening (FSD) survey shows that farmers who form the bedrock of the country’s economy are the worst-hit by the debt crisis. FILE PHOTO | NMG 

One in every five borrowers in the country has defaulted on a loan in the past one year, a new survey has established, revealing tough times for households, farmers, business owners and workers hit by the harsh economy.

The Financial Sector Deepening (FSD) survey, which has the backing of the Central Bank of Kenya (CBK), shows that farmers who form the bedrock of the country’s economy are the worst-hit by the debt crisis.

Also affected are low-income households and employees whom the survey shows are living in a debt cycle.

“Levels of debt stress are high across the board but particularly for farmers, the elderly and the poor. For these groups, difficulties in repaying loans resulted in asset sales, cutting back on expenditure, or borrowing to repay existing loans,” says the FSD Kenya study published late last month.

CBK data shows commercial banks had total outstanding loans of Sh2.7 trillion as at the end of May this year, of which Sh430.1 billion was lent to private households.


Mobile-based digital lenders such as Tala, Branch and OKash, which have gained wide popularity in recent years, have also advanced billions of shillings to the private borrowers, adding to the household debt burden.

Borrowers of personal loans and small business owners contributed nearly half of the Sh264.6 billion stock of total bad debt held by banks in 2017, according to CBK data.

Personal loan borrowers and traders defaulted on Sh121.4 billion debt in 2017, accounting for 45.89 percent of the industry total, according to the banking sector regulator. The FSD study says over half of the borrowers have had to sell assets, borrow or reduce their expenditure to repay their loans.

“Two thirds of borrowers in the country have experienced at least two symptoms of debt stress including default,” it says. “This includes being over-leveraged and selling assets, borrowing and cutting expenditure to repay loans”.

The wealthy have not been spared from the dent stress either, says the study although employees are feeling the weight of the loans more.

“Compared to the poor, wealthier groups may be over-leveraged, with a third of wealthy borrowers having debt service payments of over half their monthly expenditure. For the employed this is as high as 40 percent,” says the study.

The CBK data paints a picture of households and small traders who are taking loans that they are unable to service.

The report also captures businesses that are struggling to stay afloat and others whose operations have grounded to a halt following failure by the national and county governments as well as private sector customers to settle their dues.

Kenya’s economy has grown at an average of five percent per annum in the past four years, but the growth has been overshadowed by a steady fall in corporate profits, a stagnation in workers’ incomes and a series of employee retrenchments that have slowed down small businesses.

Spikes in prices of maize flour, beans and green grams among other foodstuffs pushed inflation to 5.7 percent in June, wiping out the temporary benefits on the cost of living brought about by recent rainfall.

This was a slight increase from the 5.49 percent recorded in May. The Kenya National Bureau of Statistics (KNBS) last month reported that though prices of vegetables like spinach, kales and tomatoes recorded a decrease by 2.42, 6.87 and 0.36 percent respectively in June, prices of maize, beans, green grams and sifted maize flour were on the increase.

The latest FSD survey on indebtedness was backed by the KNBS, Financial Sector Deepening Trust (FSD) Kenya and CBK data. Kenyan banks’ non-performing loans (NPLs) ratios were last year rated among the most elevated among major economies in Africa.

In March last year, a separate study by FSD-Kenya showed the proliferation of digital loan platforms had not improved lives. Instead, the survey showed, many Kenyans had become prisoners of these systems, in some instances borrowing to gamble or settle previous debts.

The study says about 6.5 million Kenyans are digital borrowers with 31 percent taking the cash to try their luck in betting. In March this year, a study by the Sacco Societies Regulatory Authority (Sasra) showed that reckless borrowing to buy consumables instead of investing in revenue-generating ventures is the leading cause of default among saccos and banks.

The study said this was fast making Kenyans a loan-hungry nation whose sole aim is to gain a “respectable” status.

The report, which reviewed loan books of 233 saccos in 43 counties comprising 176 deposit-taking (DT) institutions and 57 systematically important non-DT saccos, said loan default mainly arises from loanees who spend money lavishly.

Borrowers spruce up their houses, buy vehicles, fund come-and-see weddings as well as bankroll burial ceremonies to affirm their families’ stature within the society, said the study.

Borrowers were last month spared higher cost of loans after the CBK retained its benchmark lending rate at 9.0 percent for the seventh time in a row, even as lenders continue to withhold credit to the private sector.

The Monetary Policy Committee said private sector credit had grown by 5.2 percent in the year to June, compared to 4.4 percent in May. The credit growth remained well below the Central Bank’s target rate of 12 to 15 percent, a growth considered adequate to support economic development.

Bankers say the cap limiting commercial lending rates to four percentage points above the benchmark has forced them to cut back on loans to high-risk groups. Normal bank lending is capped at 13 percent.