Kenya: Loan Defaults Imminent
Nairobi, Kenya, January, 23 2008 -
Thousands of small business people who lost property in post-election violence early this month have yet to resume operations exposing lenders to the risk of massive defaults.
Top in list of possible losers are microfinance institutions (MFIs) and banks that lend to small business in poor urban neighbourhoods and rural areas.
Analysts said, the risk of default arises from the fact that most of the small business operators had their premises and goods destroyed rendering them unable to resume operations.
Business has also been slow in clash hit areas even for those who escaped arson and looting disrupting cash flow and ultimately the servicing of loans.
With only a small fraction of their lending portfolio going to small business, banks are expected to weather the storm with less pain than micro finance institutions that rely on revolving funds for their lending programmes.
Kenya Youth Business Trust (KYBT) - micro-lender with a huge client base in poor neighbourhoods such as Nairobi's Kibera, Mathare, Korogocho and Kangemi - said it had lost about 25 per cent of its loans portfolio in the post election turmoil.
"Our clients' premises were burnt, stock stolen and traders displaced by the ensuing violence whose real cost we are yet to know," said David Waithaka, the executive director of KYBT.
"The social impact could be even greater. When we start one business we expect it to positively impact on 4-6 people by providing employment, supporting families and suppliers," he said.
Although banks have reported larger absolute amounts of loans that are at risk they are cushioned by the fact that micro lending accounts for only a small part of their total loans portfolio.
Equity Bank - one of the biggest players in the micro-lending market from the banking sector said Sh30 million or less than one per cent of its Sh22 billion loan portfolio is exposed to the default risk.
At Co-operative Bank the risk is estimated at Sh70 million mostly in Western Kenyan towns such as Mumias, Kakamega, Kisumu, Eldoret and Kericho.
K-Rep Development Agency - another active player in the micro-lending market reported that its had Sh10 million in Kibera alone.
The bank said two of its clients were killed and 22 hospitalised raising the prospect of total loss.
Peter Kinyanjui, the chief executive of Family Bank however reckons that the bigger problem for lenders lies in the risk of defaults by clients whose businesses are operational but with very low sales because of disruptions.
"The full impact will be seen in a month or two when we begin to see clients defaulting on loans," said Mr Kinyanjui whose Kisumu Branch was vandalised forcing it to remain closed for 10 days.
Kenya Women Finance Trust (KWFT), one of the largest MFIs with a countrywide network said its operations in parts of Western and Nyanza provinces have been completely paralysed because of inability of staff to report back to work.
"We have had to evacuate our staff in parts of Rift Valley such as Molo where tension remains high," said Pauline Ngari, the general manager in charge of operations.
Mrs Ngari said that while the company's operations in Mt. Kenya, Nairobi and Eastern remain stable, it had scaled down to 40 per cent in Rift Valley and 30 per cent in Nyanza.
The lenders have also reported incurring increased operation costs in the form of increased security requirements and having to book staff in hotels in the parts of Rift Valley, Nyanza and Western provinces.
Mrs Ngari said operational disruptions had slowed down its assessment the post election violence to facilitate a speedy design of rescue packages. KWFT lends to women and had Sh3.6 billion in total disbursements by December 2007.
Even where the MFIs have offered refinancing packages to restock or rebuild businesses, continued tension and clashes has ensured a delay in disbursement of such funds.
The situation is compounded by the fact that for some types of businesses are experiencing very low sales as residents in slum areas divert money to buy food whose prices have gone up.
"Businesses like cyber cafes and hair salons are operating at very low levels because people have adjusted their priorities to cater for just the basics like food," he says.
This is likely to result in defaulting on loan repayments which is bad news for a business like KYBT, which relies on a revolving fund to lend.
"If 25 per cent of our loans are at risk that is 25 per cent less money available to lend and we'll have to reduce our lending unless we can get emergency funding to bridge the gap," he says.
He proposes that MFIs, government and insurance industry to come together and devise a way to mitigate against political risks by protecting the funds of MFIs similar to the deposit protection fund that benefits banks.