KENYA – Broke traders, who are banks’ second largest borrowers, defaulted on Sh100 billion in loans last year, indicating they are still struggling to shake off the lingering effects of the Covid-19 pandemic despite a reopening of the economy that has allowed full resumption of economic activities.
The Central Bank of Kenya (CBK) has expressed concerns over the high rate of loan defaults in four sectors — trade, real estate, manufacturing and personal and households — and wants banks to sufficiently make provisions in case the borrowers are completely unable to repay the loans.
“The concentration of non-performing loans was mainly in trade, real estate, manufacturing and personal and household sectors in December 2021,” said CBK. “CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions for the loans … to mitigate risk of default,” it said.
CBK data shows loan defaults grew by Sh24 billion last year to Sh460 billion up from Sh436 billion in the previous year, a 5.5 per cent increase driven by defaults in the four sectors, which together accounted for 68.6 per cent of the defaults.
Bad loans
Traders have accumulated Sh100 billion in bad loans, which is 21.8 per cent of the entire bad loans book of the banking sector last year. This is a worrying sign for lenders, because the sector took up the second largest proportion of loans disbursed to the private sector last year.
Last year, about 21.1 per cent of loans lent to the private sector went to trade, which was only behind the construction industry (21.3 per cent) but ahead of other businesses (20.4 per cent).
The real estate sector defaulted on loans amounting to Sh74.9 billion, which is 16.3 per cent of the total loan defaults, manufacturing defaulted on Sh74.6 billion (16.2 per cent) while households, who are the single largest borrowers from banks, defaulted on Sh65.9 billion (14.3 per cent).
The defaults by households come even as they increased borrowing from banks for domestic use by 7.5 per cent between March last year and this year.
Their borrowing took up 10 per cent of the total loans issued by local banks to the private sector during that time underlining the increasing reliance on loans over the high cost of living.
Meanwhile, of the Sh3.25 trillion loans that banks had issued as at December last year, Sh902 billion (27.7 per cent) were issued to households, who borrowed Sh34.2 billion more between March last year and this year.
Traders, manufacturers and real estate developers borrowed heavily last year to inject fresh capital into their businesses to revive their performance in the aftermath of the pandemic with the sectors driving economic growth during that period.
The Economic Survey 2022 shows the 7.5 per cent growth of the economy in 2021 was driven by a 6.9 per cent growth in the manufacturing sector, a 7.9 per cent growth in wholesale and retail trade, 6.7 per cent in real estate and 7.2 per cent in transportation and storage.
Defaulted loans
While the banks expect to eventually recover most of the loans that are currently in default, the lenders have told the CBK that they expect to lose Sh10.96 billion from last year in defaulted loans that they do not expect to recover from borrowers and have therefore booked the loans as losses.
The CBK requires commercial banks to classify loans and advances extended to their customers using a performance-based criteria based on repayment capability of the borrowers. The loans are classified as either normal, watch, substandard, doubtful, while loans that are due their repayment date by over 360 days are booked as losses.
By the end of last year, the value of loans that borrowers had gone over the 360-day threshold past the repayment date and thus were accounted as losses had hit Sh102.6 billion up from Sh91.6 billion in the previous year.
“The increase in the non-performing loans under doubtful and loss categories were occasioned by deteriorating asset quality as a result of the Covid-19 pandemic, enhanced reclassification and provisioning of loans, challenges in the business environment and increased default of digital loans,” said CBK.
