An electronics appliances shop in Nairobi. CBK data shows the bulk of loans went into household and consumer durables. FILE PHOTO | NMG
Kenyan banks could be sitting on a ticking time bomb after it emerged that the lenders dished out more loans for consumption at the expense of the productive sectors of the economy.
This comes at a time when businesses are laying off workers to cushion against the adverse effects of the Covid-19 pandemic.
The Central Bank of Kenya monthly economic data shows that banks channelled Ksh2.81 trillion ($25.77 billion) to the private sector last year with over 26 percent (Ksh748.6 billion or $6.86 billion) of the total loans going to households (16.2 percent) and to the acquisition of consumer durables (10.35 percent).
This compares unfavourably with agriculture (three percent), manufacturing (14.54 percent), building and construction (4.2 percent), transport and communication (7.5 percent), finance and insurance (3.6 percent), real estate (14.4 percent), mining and quarry (0.43 percent), business services (5.69 percent) and trade (17 percent).
According to CBK, the latest trend poses a concern on the financial stability of the industry since declining revenues and profitability for firms and furloughs increase credit risks as those with outstanding debt will be unable to service them.
According to the World Bank’s Economic Update for Kenya dated November 2020, more than 20 percent of Kenyan businesses laid off workers, translating into more than one firm in every five firms reducing its workforce in 2020.
According to the report, the country’s economy has been hit hard by Covid-19, severely affecting incomes and jobs, with private sector credit growth remaining modest, while credit to the government accelerated to its fastest hitting Ksh1.86 trillion ($17.06 billion) in December 2020 from Ksh1.65 trillion ($15.13 billion) in January of the same year.
“The generally subdued business environment has seen non-performing loans (NPLs) increase across manufacturing, trade and personal sectors,” according to the report.
Global rating agency Moody’s Investor Service noted that some borrowers, primarily smaller borrowers and those in vulnerable sectors, will eventually default on their loan obligations leading to a significant rise in NPLs, with a modest increase toward 14 percent in 2020 and the risk of a more significant increase in 2021.
“Provisioning will rise in 2020 in anticipation of higher NPLs,” Moody’s said through its Kenyan banks outlook report dated September 2020.
“We expect Kenyan banks’ return on assets to drop toward two percent over the next 12 to 18 months, from above three percent in the past. Recurring profitability will nonetheless remain strong and absorb higher provisioning charges without eroding capital.”
The industry’s credit growth rebounded after the removal of the rate caps in November 2019, which constrained credit growth by encouraging low-risk sovereign investments over private-sector loans, and larger customers over riskier Micro, Small and Medium-sized Enterprises (MSMEs).
Private-sector credit increased by nine percent in April 2020, from 6.6 percent in October 2019, but growth slowed to 7.6 percent in June 2020.
Credit to the private sector expanded by 8.3 year-on-year in August 2020 compared with 6.3 percent year-on-year in August 2019.
On the other hand, the share of NPLs slightly increased to an average of 12.9 percent in the first eight months of 2020, from 12.6 percent in the same period in 2019, with the ratio pointing to a significant level of problem loans.
“Private sector credit growth has trended higher over the course of 2020 but remains moderate, partly due to rising Covid-19 related uncertainty and increased government borrowing,” according to the World Bank.
“As a result, commercial banks are taking a cautious approach in extending fresh credit, in an environment where corporates and individuals are increasingly seeking extensions on their loan repayments due to liquidity challenges.”
Kenya’s unemployment rate increased sharply, approximately doubling to 10.4 per cent in the second quarter (April-June) of last year, with many wage workers who are still employed facing reduced working hours, with average hours decreasing from 50 to 38 hours per week.
According to the World Bank, the shift to online and mobile banking has helped the financial sector adjust to Covid-19 with limited frictions, and temporary waivers on loan performance classification (and provisioning) has helped to support banking system liquidity.
In the first half of 2020, the banking industry’s profitability declined by 30 percent and assets quality deteriorated, with the ratio of NPLs to gross loans increasing to 13.1 percent in June 2020 from 12 percent in December 2019.
Total banking sector lending increased by 1.2 percent, to Ksh2.94 trillion ($26.97 billion) in the third quarter (July-September) of 2020 from Ksh2.9 trillion ($26.6 billion) in the second quarter (April-June) of 2020.
The increase in gross loans and advances was largely witnessed in the personal/household and transport and communication sectors.
The general increase in gross loans was mainly due to increased credit granted for working capital purposes, and loans granted to individual borrowers.
According to CBK, economic slowdown due to Covid-19, rising credit risks, declining profitability, concentration risk in the capital market, weak balance sheets for listed corporates and State-Owned Enterprises (SOEs), and corporate governance challenges may undermine financial sector stability.
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