Kenyan Banks Face Sh150 Billion Surge in Bad Loans Amid Economic Turmoil

The high cost of living due to a weak currency and disruptions in the global supply chain resulted in Kenyan banks facing an additional Sh150 billion in bad loans in 2023, bringing the total to Sh651.8 billion.

The Central Bank’s Banking Supervision Report, released Thursday, highlights the sharpest deterioration in banks’ asset quality over the past five years, with a nearly 30 percent increase in bad loans compared to the previous year. Gross non-performing loans for 2022 were Sh503.2 billion.

Non-performing loans were concentrated mainly in the Trade, Manufacturing, Real Estate, and Personal and Household sectors, accounting for 72.9 percent of total loan defaults. Traders were the primary defaulters, driven by a volatile business environment that saw the dollar’s exchange rate surpass Sh160, inflating import costs. The trade sector accounted for 21 percent of all bad loans during the review period, valued at Sh137 billion. The manufacturing sector followed closely at 20.7 percent, or Sh135.6 billion.

The real estate sector’s turbulence led to a significant drop in its contribution to the country’s Gross Domestic Product (GDP) by 38 percent, resulting in Sh111.5 billion in loan arrears. The personal and household sector, comprising 12,146,217 loan accounts, reported Sh92 billion in loan defaults, accounting for 14.1 percent of the banking sector’s gross non-performing loans.

The Central Bank of Kenya (CBK) expressed concern over the sharp rise in bad loans and is working closely with lenders to mitigate the crisis. “CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions to mitigate the risk of default,” the report states.

The loans and advances across different risk categories saw notable increases: Normal (13.3 percent), Watch (11.0 percent), Substandard (58.5 percent), Doubtful (9.0 percent), and Loss (60.3 percent). The normal category accounted for 72.5 percent of total loans in 2023, compared to 73.8 percent in 2022, while the watch category accounted for 12 percent, down from 12.1 percent in 2022. The substandard, doubtful, and loss categories accounted for 3.3 percent, 7.8 percent, and 4.5 percent of the loan book in 2023, compared to 2.9 percent, 8.1 percent, and 3.2 percent in 2022.

During the year, banks increased loan advances from Sh3.6 trillion to Sh4.08 trillion. However, asset quality, measured by the ratio of gross non-performing loans (NPLs) to gross loans, deteriorated with the ratio rising to 15.6 percent in December 2023 from 13.9 percent in December 2022.

The Core Capital to Total Risk-Weighted Assets ratio decreased slightly from 16.1 percent in 2022 to 15.4 percent in 2023, while the Total Capital to Total Risk-Weighted Assets ratio fell from 19 percent in 2022 to 18.6 percent in 2023. The core capital to total deposits ratio also declined to 16 percent during the review period from 17.2 percent in 2022.

“The Kenyan banking industry remained fully compliant with the capital adequacy ratios in 2023,” the report notes.

The average liquidity ratio as of December 2023 stood at 51 percent, a slight increase from 50.8 percent in December 2022, attributed to higher growth in total liquid assets compared to short-term liabilities.

Despite these challenges, total income for the banking sector increased by 20.7 percent to Sh899.3 billion in December 2023 from Sh744.8 billion in December 2022. This increase was driven largely by a rise in interest on placements (166.3 percent), interest on advances (29.7 percent), other fees and commission income (22.9 percent), and interest on government securities (11.5 percent).

However, the banking sector registered a decrease in profitability in 2023, with profit before tax declining by 8.8 percent to Sh219.2 billion from Sh240.4 billion in 2022. The decrease in profitability was attributed to a higher increase in total expenses (Sh175.3 billion) compared to the increase in total income (Sh154.1 billion).