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Shopkeepers hardest hit by defaults: CBK survey

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A shopkeeper packs sugar. FILE PHOTO | NMG

Summary

  • The CBK Financial Sector Stability report shows that 45.4 percent of those who acquired goods on credit from shopkeepers had defaulted, threatening the stability of corner shops and groceries.
  • The banking regulator has raised the alarm on the rising incidence of defaulters at shops, which is nearly three times that of mobile phone loans, arguing that it has the potential of putting pressure on bankers that lend to the retailers.
  • The drop comes in a period when corporate Kenya has witnessed reduced profitability that has ushered in job cuts, freezes in hiring and near stagnant wages in the race to protect profit margins.

Half of Kenyans who take goods from shopkeepers on credit either fail or delay to pay back, reveals a Central Bank of Kenya (CBK) report that reflects the cash flow problems in an economy plagued by job cuts and modest economic activity.

The CBK Financial Sector Stability report shows that 45.4 percent of those who acquired goods on credit from shopkeepers had defaulted, threatening the stability of corner shops and groceries.

The banking regulator has raised the alarm on the rising incidence of defaulters at shops, which is nearly three times that of mobile phone loans, arguing that it has the potential of putting pressure on bankers that lend to the retailers.

The drop comes in a period when corporate Kenya has witnessed reduced profitability that has ushered in job cuts, freezes in hiring and near stagnant wages in the race to protect profit margins.

This has hurt cash flow for both individual and small firms in what the CBK says has led many Kenyans to say their financial health has worsened despite growth in gross domestic product (GDP).

“Default rate for shopkeeper’s credit in the form of goods and services was 45.6 percent but shopkeeper’s credit in form of cash had default rate of just 1.8 percent,” said the CBK.

“Inability of households to repay goods purchased on credit reduces the capacity of shopkeepers to repay their loans, which reduces asset quality of financial institutions.”

CBK reckons that shopkeepers now account for the largest proportion of credit, reflecting cash flow challenges for both homes and businesses.

While Kenya’s economy expanded 5.8 percent last year from 4.8 percent in 2017, private sector activity — which translates to jobs and higher pay — has remained muted. Companies are struggling with reduced sales and profits in a soft economy that has persisted since 2017 when Kenya went through a bruising General Election.

Key firms have put on hold hiring of new staff in an economy that has also witnessed a string of job losses in recent months affecting nearly all sectors.

Digital loans

“Despite a robust GDP growth in 2018 and 83 percent access to formal financial services by Kenyans, the proportion of households who felt that their financial health status worsened in the 2018 survey increased to 51 percent from 34.3 percent in the 2015 survey,” CBK said.

The worsening household financial health also hurt lenders, providing loans through mobile phone platforms as the ease of digital borrowing created an ever-growing pool of distressed borrowers.

CBK ranked defaults of mobile loans as second worst with about 18.1 percent of the borrowers in default. Only 2.2 percent of bank borrowers defaulted on their loans while Saccos had 2.9 percent.

Many Kenyans now find they can get loans in minutes with banks and providers like Tala and Branch relying heavily on algorithms that build a financial profile of customers in the quest to minimise the risk of default.

The higher non-performing digital loans have triggered an increase in the number 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 out of a population of around 45 million, have been negatively listed with CRBs, according to official data. The bulk of the defaulters had borrowed loans below Sh1,000, mostly through mobile phones.

CBK reckons that the defaults are rising because the loans are not being channelled for productive activities that empower borrowers to settle their loans on time.

“The main expenditures on which borrowers diverted their loans included food items, utility bills, unexpected emergencies and paying off other loans,” CBK said. “These expenditures do not generate income to service the loans.”

The regulator says the high interest rates linked to digital loans are also behind the defaults. Tens of unregulated microlenders invaded Kenya’s credit market in response to the growth in demand for quick loans. Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualised.

“Lack of transparency on the side of the loan provider affects borrowers’ probability of default,” the CBK report says.

“This is more common for mobile banking loans, and those from informal providers, where terms of the loan in terms of repayment and interest were not well understood.”