Kenya: Banks face risk of loans default amid business stalemate

Jan 2008
Kenya, January, 04 2008 - The risk of loan default loomed large as political violence persisted for the sixth consecutive day interfering with operations of small businesses that account for much of the recent bank lending, analysts warned.

The standoff has resulted in business closures and in turn affected cash flow in most businesses eroding their ability to service loans.

Other borrowers have been hit by double tragedy after their premises were broken into and looted or torched by rioters in the post election fracas. Insurance companies in Kenya do not cover political risk, eliminating the possibility of business recovering the loss.

Analysts predicted a possible credit crunch as well as an increase in the volume of non-performing loans if the situation does not improve.

According to Central Bank of Kenya, non-performing loans had declined by 31 per cent from Sh102.0 billion in June 2006 to Sh70.7 billion in June 2007.

The decline was mainly attributed to the repayment by the Government of its guaranteed debts amounting to Sh20 billion to the National Bank of Kenya.

The previous year had seen a lending boom by banks and micro finance institutions to small and medium scale enterprises which have now emerged as major economic drivers in the last five years. But those gains could now be lost.  

The raging violence has targeted small businesses in major towns, where most borrowers are more likely to set up businesses. While small businesses in the central business district of the capital Nairobi have been spared the agony of looting, not so for those in the estates and in Mombasa, Eldoret, Kakamega and Kisumu, important regional commercial points.

“Certainly, there will be a financial effect even if things returned to normal today,” said banking analyst and publisher of the Banking Survey Ochieng Oloo.

 According to the Central Bank of Kenya, growth in private sector credit accelerated from 13.3 per cent in September 2006 to 17.5 per cent in the year to September 2007. Total credit was Sh465 billion.

Most of the credit to private sector in the year to September 2007 was to ‘other activities’ (58.6 per cent), private households (38.4 per cent), building and construction (7.3 per cent), transport and communication (7.1 percent), and business services (4.7 per cent)

Data on the specific amount of loans lent for business purposes could not be obtained immediately although the industry estimates that the amounts run into hundreds of billions.

Also likely to be affected will be the two revolving funds given out by the government last year to the youth and women enterprises. Already, Sh1 billion for the youth has been disbursed and some institutions have disbursed part of the Sh2 billion allocated to the women.

Initial indicators for the youth fund showed that women borrowers used the money better and repaid promptly yet the current political violence is likely to affect women and children more. lso affected will be the Sh200 million loan to Kenya Women Finance Trust.   

Lenders who could be affected adversely are those whose borrowers service their loans on a weekly basis. It would mean that a week without sales is a default or otherwise, the loan is repaid using savings. .

Most micro lenders in Kenya have an average loan repayment rate of 98 per cent

According to Oloo, the situation could however be reversed if the political stalemate does not take long to rectify. Banks and micro-finance institutions could then take to assisting the affected businesses to get back on track.

Possible options include making arrangements include rescheduling loan repayment period without necessarily incurring additional interest costs to the borrower. But the challenge will even be higher for small business owners whose premises have been looted.

“It is a matter of life and death for small businesses and they will need to work out a plan with their lenders in order to be able to service their loans,” said Oloo.

Justus Agoti, a research analyst with the stock brokerage firm Sterling Securities said there is a definite worry within in the banking industry that a credit crunch will happen, unless a political solution is found to the current stalemate

The other worry, according to John Wanyela, executive director of Kenya Bankers Association is that banks have not been able to open their branches, either because the situation is volatile or workers have not been able to gfet to the offices.

This reality is already undermining investments that banks have made in the recent past on branch expansion, which was meant t tap into the growing number of bankable Kenyans, because of a growing economy


Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More