EA banks record rise in bad loans, Rwanda improves slightly

A KCB and Equity Bank agent in Rwanda. Rwanda’s banking industry has been affected by high operating costs and non-performing loans, with KCB and Equity Bank both reporting losses in their units last year. PHOTO | CYRIL NDEGEYA |   NATION MEDIA GROUP

By ALLAN OLINGO, The EastAfrican

In Summary

• In Kenya, banks are expecting a rise in non-performing loans in the energy and water, manufacturing, real estate and agricultural sectors.
• In Uganda, the building and construction sector saw the biggest rise in its non-performing loans.
• Tanzania attributed the rise to non-performance within households who held personal loans and lending to trade, manufacturing and the agricultural sectors.
• Rwanda’s banking industry has been affected by high operating costs and non-performing loans.

Kenya, Uganda and Tanzania recorded a rise in their non-performing loans (NPLs) last year, forcing local banks to set aside part of their profits to cover this category of credit. Rwanda, however, registered a slight decline in bad loans.

According to the Central Bank of Kenya Credit Officer Survey Report for 2014, non-performing loans increased by 30.6 per cent to $1.12 billion, up from $872 million in 2013. Gross loans increased by 22.8 per cent from $17.3 billion to $29.3 billion in the same period.

Kenya experienced an increased appetite for credit in six of its eight economic sectors. The report says that this year, banks are expecting a rise in non-performing loans in the energy and water, manufacturing, real estate and agricultural sectors.

The rise in non-performing loans comes in the wake of a warning from Moody’s Ratings that Kenya’s rapid lending growth risks plunging the country’s banks into a bad loans crisis.

“We caution that specific provisioning levels are already low, at less than 40 per cent of non-performing loans, and a slight increase could fast widen the provision gap,” said Moody’s in its latest report.

“We expect an increase in non-performing loans till mid-2016 and this will eat up banks’ earnings that have been growing robustly in the past three years.”

But CBK has backed a capital buffer of 2.5 per cent above the minimum regulatory core capital of eight per cent and total capital of 12 per cent, to safeguard against shocks arising from bad loans.

“Capital buffers enable banks to continue lending even in difficult times,” said CBK.

But the International Monetary Fund warned that the coverage ratio, the amount set aside as provision for bad loans as a ratio of total non-performing loans, has been declining and requires attention.

While applying for the insurance risk fund of $700 million from the IMF, Treasury Cabinet Secretary Henry Rotich said that by the end of March, Kenya intends to review and strictly implement the Prudential Guideline on Risk Classification of Assets and Provisioning.

READ: Kenyan banks exposed to bad loans danger: IMF

“Starting March, we will require banks to provide CBK with detailed information on restructured loans on a monthly basis with a view to avoiding lending ever-greening practices for bank credit; and also provide data on loan-loss recovery rates,” said Mr Rotich in the letter to IMF.

In Uganda, the building and construction sector saw the biggest rise in its non-performing loans, which grew by $16.5 million to $39.8 million at the end of June 2014. This accounted for 22.8 per cent of the total NPLs.

The country’s non-performing loans to total gross loans ratio increased from 4.0 per cent to 5.8 per cent between June 2013 and June 2014, from $104.7 million to $174.8 million.

Burundi and Tanzania recorded the highest levels of NPLs in the region last year, at 12.7 per cent and 8.5 per cent respectively. The region’s average was 8 per cent, 3 per cent above the 5 per cent recommended by the countries’ central banks.