Address hurdles facing Kenyan banking sector

The Central Bank of Kenya. FILE PHOTO | NMG 

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The latest banking sector report indicating that the loans default rate hit a 13-year high in April has
once again highlighted the debilitating effects that Covid-19 containment measures have had on the economy.

These grim figures should provide food for thought as the National Treasury prepares to unveil the 2010/21 fiscal measures on Thursday. The budget measures must adequately address how the entire economy can live with Covid-19 since the government has opted to extend its lockdown on the economy for another 30 days.

Otherwise, anxiety over rapid spread of the deadly disease had depressed economy from as early as late January, long before the country detected its first Covid-19 case on March 12.

Latest Central Bank of Kenya (CBK) data shows that the ratio of non-performing loans rose from 12.5 percent to 13.1 percent by end of April, the highest since August 2007 when it stood at 14.41 percent.

Borrowers default on loans all the time but financial institutions only classify them as non-performing if they are not serviced for more than 90 days. It is the stock of such loans that has jumped by Sh11.1 billion to stand at Sh366.8 billion in April. And this has not happened in a vacuum. The public health measures have forced many businesses to either scale down their operations or shut their doors altogether. In the process, thousands of workers have either lost their incomes or been forced to take pay cuts.

The results are businesses and individuals with low capacity to service loans. And so, thousands have defaulted on their loan obligations. Others, sensing the danger ahead of falling into delinquency, have approached their banks to have their loans rescheduled.

CBK data shows the country’s seven largest banks alone had in April restructured loans worth Sh176 billion or 6.2 percent of the industry’s total gross loan book of Sh2.8 trillion.

This comes on the back of reports showing that Kenya Purchasing Managers’ Index, which tracks private sector activity, remains in contraction territory, far below the 50 points from where expansion starts.

In short, the challenges facing the banking sector must be addressed urgently given the facilitating role that a robust financial system plays in the economy. But our banking system can only be as healthy as the stability of the entire economy.