Banks may have to pay around Sh1 trillion to offset the predicted high loan default rate due to high bank rates caused by the high cost of living on a weak shilling and high gasoline costs.
Industry participants are concerned that this would reduce year-end earnings and impede post-Covid growth.
The Central Bank of Kenya increased the basic lending rate to 12.5% on Tuesday after holding it at that level for three months. For borrowers with questionable credit histories, this effectively hiked lending rates to a maximum of 26%.
“The cost of living is rising while disposable income is shrinking at an alarming rate. Borrowers are torn between buying food and repaying debts. The recent jumbo rate hike has just worsened the situation,” investment banker Pamela Simani said in an interview.
She continued by saying that as small company owners find it difficult to secure financing to grow their operations, job losses are probably going to result.
James Njagah, her counterpart, asserts that because of the high lending rates, banks would probably lend money carefully, especially to the private sector. Most of them will likely focus on government papers since they provide better security and returns.
“What happens when the government is buying bonds close to 20 percent yet a typical household borrower is offering an average of 18 per cent? This is not good at all,” Kimani said.
He maintains that notwithstanding the shilling’s decline vs other global currencies, a 200 basis point increase was not required.
CBK reports that in October 2023, the percentage of gross non-performing loans (NPLs) to total loans was 15.3%, down from 15% in August 2023.
The manufacturing, trade, personal and family, building and construction, and transport and communication sectors all saw increases in non-performing loans (NPLs).
The banks have kept up their good provisioning for non-performing loans. The rate of growth in private sector credit increased from 12.2% in September to 12.5% in October, showing a somewhat consistent trend.
The following industries had strong credit growth: consumer durables (10.8 percent), trade (9.9 percent), manufacturing (18.4%), and transportation and communication (16.2%).
Nevertheless, there were still a lot of loan applications and approvals, indicating that there was a constant need, especially for working capital needs.
Top banks like Equity, KCB, Co-operative Bank of Kenya, Stanbic Bank, and I&M Bank have increased their loan loss provisioning amounts due to the growing default rate, even though the industry’s pre-tax earnings increased by 13.6% to Sh65.1 billion.
In spite of this, according to CBK, the banking industry is nonetheless robust and stable, with high capital adequacy ratios and liquidity.
This type of debt default was last seen in the nation in 2005, when it reached around 30 percent.
Customers of several banks have already been notified of their intentions to increase lending rates in accordance with the new benchmark rate.
“Dear customer, we hereby inform you of the decision to raise the borrowing rate by two per cent starting this month,” Absa Bank informed customers in text messages.
Since then, other parties including Equity, NCBA, and Stanbic Bank have also had an impact on the new loan pricing rate.
In confidentially, a senior manager at Equity Bank Group—who is not authorized to speak on behalf of the lender—stated that banks are keeping a closer eye on borrowers to make sure they don’t burn what they have.
“Banks are riding on artificial intelligence to conduct thorough analyses on borrowers in the wake of high nonperforming loans. While investment in state papers looks promising, lenders are also hesitant,” he said.
His boss, James Mwangi, told investors last month that Equity Bank prioritized clients before profits after the Kenyan unit recorded a profit decline for the first time in seven years.
“We decided to choose the customer over profit,” Mwangi told investors.
