Defaults on bank loans crossed the 500 billion shillings mark for the first time, forcing thousands of borrowers to foreclose on their assets in an economy hit by reduced cash flow and inflation that weighed household budgets and demand for goods.
Latest data from the Central Bank of Kenya (CBK) shows delinquent loans rose by 30.6 billion shillings in June to 514.4 billion shillings – the largest monthly increase in recent history.
The mounting defaults reflect the struggles of workers and businesses in an economy that has yet to fully recover from a coronavirus-induced crisis, which has triggered job cuts and business closures.
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A severe drought, runaway inflation that has hit demand for goods, scarce jobs and prolonged political uncertainty following the disputed presidential vote have created a growing pool of troubled borrowers whose assets are being grabbed by newly aggressive lenders .
The share of non-performing loans reached a new high of 14.7% in June, a higher ratio than the 14.55% recorded in March 2021 when Kenya was battling the economic difficulties of Covid-19.
“Sectors that have driven NPLs higher are construction, particularly in infrastructure like roads, hospitality and manufacturing,” KCB Group Chief Executive Paul Russo said on Wednesday.
The CBK, in its briefing after the last meeting of the Monetary Policy Committee (MPC) on July 27, said that the increase in defaults was attributable to a few large borrowers facing specific challenges in their respective businesses.
Manufacturers have complained of a drop in demand following skyrocketing inflation and the start of the election season.
Inflation hit a 62-month high in July at 8.3% as prices soared for essentials like cooking oil, food, fuel and soap, which squeezed budgets households and the demand for goods and services.
This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where businesses have frozen wages as they recover from the economic difficulties of Covid-19.
Rising commodity costs forced workers to cut back on non-essential items such as beer and airtime, which ultimately hurt companies like East Africa Breweries Limited (EABL) and Safaricom.
Many companies want the election over before investing more, mindful of the weeks of post-election violence following the disputed 2007 presidential election that killed around 1,200 people and saw the economy take a nosedive.
This dampened expansion of factories that create new jobs and boost circulating cash.
This year, the contested vote was not followed by violence.
Last week, the Independent Electoral and Boundaries Commission (IEBC) said Vice President William Ruto won the election by a narrow margin, but four out of seven election commissioners disagreed, saying the vote tally had not been transparent.
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IEBC President Wafula Chebukati declared Dr Ruto the winner with 50.49% of the vote against 48.5% for opposition leader Raila Odinga.
Mr Odinga has asked the Supreme Court to overturn the presidential election result on several grounds, intensifying a political competition that has thrown investors into uncertainty.
“Businesses were waiting to see the outcome of the election and now there is uncertainty due to the Supreme Court case. There are end-to-end payment delays,” said a bank CEO, who did not wish to be named.
Businesses that have taken out loans based on their projected cash flow are struggling to meet loan obligations.
Mr Russo said lenders had accelerated the collection of bad debts, stepping up property auctions.
Auctioneers say asset foreclosures are up this year but are struggling to sell assets in a market witnessing a glut of repossessed vehicles, land, homes and office equipment .
This highlights the shortage of cash in the economy.
Joseph Gikonyo, the managing director of Garam Auctioneers, told the business daily as foreclosed properties multiply and lenders turn to private treaties to sell the assets.
“Other auctions are underway, but anything that needs to be appraised, including cars, machinery, houses and land, is making little headway,” Mr Gikonyo said.
“At the moment, only moveables like household goods that are quite affordable are attracting potential buyers, if any. The situation has gone from bad to worse.”
Commercial banks are avoiding aggressive auctions of seized assets from defaulting debtors in favor of private settlement after Kenya’s sluggish economy cut asset prices below the minimum bid value set by law .
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Under private treaties, distressed borrowers agree with banks to seek the best available price for their properties and sell to repay the loans instead of relying on the auctioneer’s hammer.
The move gave banks the ability to circumvent the 2012 land law, which prevents them from auctioning foreclosed assets at less than 75% of prevailing market value.
Auctioneers do not sell as quickly as they repossess due to the minimum bid price.