Loan defaults increased for the fifth consecutive month to hit a record Sh483 billion in May amid a stressed economy that has made it harder for individuals and businesses to service their loans.
Data from the Central Bank of Kenya (CBK) shows non-performing loans (NPLs) have been on the rise since December last year when they fell to Sh426 billion down from Sh436 billion in November to mark a second consecutive monthly drop in loan defaults.
The bad loans book has since shot up to Sh483.8 billion in May, signalling tougher economic conditions for borrowers in key sectors of the economy amid high inflation.
The tough economy has, however, pushed more households and firms to rush for new loans from banks for personal use and business operations respectively.
This saw banks lend Sh361 billion between May last year and this year, increasing the gross loans issued to the private sector to Sh3.44 trillion.
This is in comparison to the Sh181 billion that the lenders issued between May 2020 and May last year, underlining the growing appetite for bank loans.
In March, the ratio of bad loans rose to 14 per cent against the gross loans issued, up from 12.5 per cent at the beginning of the Covid-19 pandemic in March 2020.
Banks have since then been facing ever rising loan defaults, after the pandemic affected millions of households as their incomes dropped and businesses ground to a halt.
Households and businesses across the country are currently reeling from the effects of high inflation, which has lowered demand for goods and services as their prices increasingly get out of reach for many consumers.
Prices of key inputs such as fuel have also gone up, exerting a further strain on the pockets of individuals and businesses, affecting their ability to repay their loans.
The trade, real estate, manufacturing and personal and household sectors, which are also the largest borrowers, hold the highest concentration of bad loans.
The International Monetary Fund (IMF) last week warned that credit growth is expected to remain in the single digits, tipping banks to pursue a cautious approach in the current environment.
“Micro, small and medium enterprises (MSMEs) still face a large credit gap, while playing a key role in economic activity,” said IMF.
Households are the single largest private-sector borrowing group, taking about 27.7 per cent of all loans issued across sectors last year and accounting for 14.3 per cent of the loan defaults during the same period.
Meanwhile, trade – which made up 17.6 per cent of all loans extended to the private sector – contributed the highest proportion of loan defaults at 21.8 per cent of the banking sector’s NPLs book last year.
This development is set to worry banks, who enjoyed record profits last year driven in part by lower loan loss provisioning due to the reduction of bad loans as the economy sharply rebounded from the effects of the pandemic.
Kenya Bankers Association (KBA) Chief Executive Habil Olaka in May explained that last year’s performance by banks, which made a record Sh143.71 billion profits after tax, was boosted by a positive outlook on their loans following the economic recovery. “Most of them for which provisions for possible losses had been taken in 2020, either did not need similar levels of provisions in 2020, while some actually had fully recovered and had their loan provisions released as they were not needed in view of the positive prospects that the accounts displayed,” said Mr Olaka.
Kenya’s economy rebounded strongly in 2021 to grow 7.5 per cent following the reopening of the economy as well as targeted stimulus interventions by the government.