Commercial banks feel the weight of high priced loans

Customers queue for service inside a banking hall. Photo/File 

By George Ngigi

Commercial banks reported a steep rise in the volume of non-performing loans in the month of May, underlining the pain that businesses and households are suffering under a high interest rates regime that has persisted since the third quarter of 2011.

Central Bank of Kenya (CBK) data shows that non-performing loans rose by Sh10 billion or 14.2 per cent to Sh80.3 billion between March and May this year – the highest in six years.

Bank loans are officially classified as non-performing if they are not serviced for a period exceeding three months.

At Sh80.3 billion, the non-performing loans (NPLs) are equivalent to 5.6 per cent of the total industry loan book of Sh1.44 trillion, up from 4.4 per cent a year ago.

The rise in the volume of NPLs came even as the wide interest margins enjoyed by the lenders pushed the industry’s profits before tax to Sh48.7 billion or 11.2 per cent higher than last year’s Sh43.8 billion.

Kenya National Bureau of Statistics (KNBS) on Friday released fresh economic data showing that the financial sector growth had suffered from a slowdown in credit demand. “The sector’s growth slowed to 1.2 per cent during the first quarter of 2013 compared to a growth of 3.1 per cent in the same period last year,” says the report.

The slowdown in growth in the first quarter of the year is, however, linked to the dark political clouds that hang over the Kenyan economy as the country prepared for the March 4 election – the first after the tumultuous December 2007 poll.

Economic activity slowed down to a near standstill as the country came under intense election campaigns that suppressed productivity in the manufacturing, hotels and restaurants and financial intermediation sectors, said KNBS.

“The general economy had been sub-par up to the election. This was a near perfect example of the cause and effect of political risk,” said Aly-Khan Satchu, the managing director of Rich Management, a financial advisory and data vending company.

The increase in non-performing loans was against industry expectations as captured in the CBK’s Credit Survey report released in April.


“For the quarter ending June 2013, institutions forecast that the NPLs will generally remain unchanged,” said the report, which also indicated that the lenders expected bad loans to increase in the building and construction, transport and communication and real estate sector. The increase of bad loans in the three sectors would, however, be offset by a drop in the tourism, restaurant and hotels sector as well as in the trade segment, says the report..

“This is a matter that should be of concern to economic managers. Bad loans generally show that resources are not being channelled to the most productive sectors of the economy,” said Dr X.N. Iraki, a lecturer at the University of Nairobi’s Business School.

Interest in bad loans is linked to the dark history Kenya had with them in the 1990s when they caused a number of bank collapses.


Banks have more recently been able to absorb the defaults shock through robust loan books growth that has kept the proportion of non-performing loans in check.

It has been difficult for banks to sustain that method of operation in an environment of high lending rates that has persisted in the past two years, slowing down the growth of their loan books.

CBK’s series of policy rate cuts has seen commercial banks set their base lending rates at 18 per cent, leaving effective rates above 20 per cent.

The astronomically high interest rates have persisted for close to two years, putting pressure on households and businesses, whose monthly repayment instalments increased to reflect the changes.