The loan default rate in Kenya has reached a 17-year high of 14.8 percent, with smaller banks being the most affected, according to the Kenya Bankers Association (KBA). Recent industry data indicates that rising loan defaults are leading to a reduction in new lending, as banks burdened with elevated non-performing loans (NPLs) have limited capacity to extend new credit.
The KBA’s 2023 State of the Industry report reveals that the stock of NPLs in the banking sector continued to rise, reaching approximately Sh621.3 billion. This marks an increase from Sh503.2 billion in 2022, with NPLs accounting for 14.8 percent of gross loans—the highest level since 2007.
Samuel Tiriongo, KBA’s Director of Research and Policy, noted that the elevated NPL levels have made banks more risk-averse, leading 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.
In response to the surge in bad loans, banks nearly doubled their loan loss provisions, increasing them to Sh109.51 billion from Sh68.8 billion the previous year.
This represents a 59.17 percent year-on-year growth, primarily driven by a 67.3 percent increase among large banks. In contrast, small and medium banks saw more modest increases of 24.2 percent and 15.7 percent, respectively.
The banking sector took these measures to mitigate potential credit losses in late 2023 and 2024. The Kenya Bankers Association explains that the higher provisions were implemented to protect against potential losses, with early collections being prioritized to manage overdue payments and oversee portfolio management.
“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.
In 2023, assets of deposit-taking microfinance banks (MFBs) declined by 8.8%, continuing a downward trend. Net loans and advances also fell as liabilities decreased, with asset quality worsening and the sub-sector’s non-performing loan (NPL) ratio rising to 31.7%.
Meanwhile, the banking sector’s total assets increased by Sh1.2 trillion to reach Sh7.7 trillion, representing a 17.6 percent annual growth and reversing the modest growth observed in 2022. This growth was largely driven by large banks, which saw a 21.8 percent increase in assets, notably diversifying their portfolios with more placements with other banks.
Commercial bank lending to the private sector grew by 13.9 percent in 2023, up from 12.5 percent in 2022 and 8.6 percent in 2021. This growth was fueled by strong credit expansion in sectors such as manufacturing (20.9 percent), transport and communication (20.8 percent), trade (13.1 percent), and consumer durables (9.9 percent).
Despite this positive lending growth, the ratio of gross NPLs to gross loans remained high, closing at 14.8 percent in December 2023. This continued elevation raises concerns about future trends and its impact on credit extension.
During the review period, banks also benefited significantly from state securities, with operating income rising by 21 percent in 2023. This increase was driven by higher interest on loans, income from government securities, and a diversified range of income streams.
“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
