Bank loan defaults at 17-year high of Sh621 billion

The rate of loan default in Kenya hast hit a 17 year high of 14.8 per cent with the smaller banks most affected, according to the Kenya Bankers Association (KBA). 

Latest industry data shows that loan defaults is leading to the crowding out of new lending, as banks saddled with elevated non-performing loans (NPLs) have a constrained capacity to extend new credit.

According to the KBAs state of the industry report for 2023, the stock of NPLs in the banking system continued to edge upwards during the period, to approximately Sh621.3 billion.

This was a rise from Sh503.2 billion recorded in 2022, and as a share of gross loans, it stood at 14.8 per cent, the highest since 2007.

KBAs research and policy director Samuel Tiriongo said that that elevated NPLs triggered risk averseness among banks and consequently led to a decline in credit growth to the private sector.

“The evolution of non-performing loans (NPLs) in the industry, particularly with foreign currency-denominated loans, reflected an elevated credit risk in the economy, necessitating the adoption of several bank-level strategies to mitigate further deterioration of bank assets,” said Tiriongo.

As the banks moved to cushion themselves from bad loans, they nearly doubled loan loss provisions to Sh109.51 billion from Sh68.8billion a year earlier.

This represented a 59.17 per cent growth on a year on year basis, mainly driven by a 67.3 percent expansion among large banks, as small and medium banks carried somewhat modest expansions (24.2 percent and 15.7 percent, respectively) as banks took measures to aver expected credit losses in late 2023 and 2024.

The banking umbrella body says that higher provisions were implemented to cushion against potential losses as early collections were prioritised to address overdue payments and management of portfolios.

“NPLs’ distribution across banks was heterogeneous across all bank tiers. Among large banks, the rate of growth of gross NPLs in 2023 was 12.8 percent, as the NPLs among medium and small banks grew to 17.5 percent and 21.3 percent, respectively,” reads the KBA report in part.

Deposit-taking microfinance banks’ (MFBs) assets declined by 8.8% in 2023, sustaining its trend decline. Net loans and advances decreased as liabilities fell. Asset quality worsened, with sub-sector NPL ratio rising to 31.7 percent.

The report further shows that the banking sector’s total assets rose by Sh1.2 trillion to Sh7.7 trillion in 2023, marking a 17.6 percent annual growth, reversing the modest growth of 2022.

Large banks led this growth with a 21.8 percent increase in assets, as asset diversification was notable, with shifts towards placements with other banks.

Growth in commercial bank lending to the private sector stood at 13.9 percent in 2023 compared to 12.5 percent in 2022 and 8.6 percent in 2021, on account of strong credit growth in manufacturing (20.9 percent), transport and communication (20.8 percent), trade (13.1 percent), and consumer durables (9.9 percent) sectors.

Nonetheless, the ratio of gross nonperforming loans (NPLs) to gross loans remained elevated on trend to close at 14.8 percent in December 2023, raising concerns on its path going forward and impact on credit extension

In the review period banks reaped big from state securities, the operating income rose by 21 percent in 2023, driven by growth in interest on loans, interest from government securities and diversified income streams bolstered overall income growth.

“However, government financing risks going forward, including from the rejection of the Finance Bill 2024 and Moody’s downgrade in July 2024, pose significant threats. These risks could exert upward pressure on the exchange rate and necessitate the sustenance of high domestic interest rates,” said Tiriongo