Bank loan defaults have crossed the half a trillion shilling mark for the first time, setting up thousands of borrowers for property seizures in an economy hit with reduced cash flows and inflation that has squeezed household budgets and demand for goods.
The latest Central Bank of Kenya (CBK) data shows that defaulted loans rose by Sh30.6 billion in June to Sh514.4 billion — the sharpest monthly increase in recent history.
The mounting defaults are a reflection of the struggles of workers and businesses in an economy that is yet to fully recover from a coronavirus-induced slump, which triggered job cuts and business closures.
A severe drought, surging inflation that has hit demand for goods, scarce jobs and prolonged political uncertainty in the wake of the disputed presidential vote have created a growing pool of distressed borrowers whose assets are being seized by newly aggressive lenders.
The share of non-performing loans rose to a new high 14.7 percent in June—a higher ratio than the 14.55 percent recorded in March 2021 when Kenya was battling Covid-19 economic hardships.
“The sectors that have pushed up the NPLs is construction—especially in infrastructure like roads— hospitality and manufacturing,” KCB Group chief executive officer Paul Russo said on Wednesday.
The CBK, in its briefing after the last Monetary Policy Committee (MPC) meeting on July 27, said that the increases in defaults were attributable to a few large borrowers with specific challenges in their respective businesses.
Industrialists have complained of reduced demand following the sky-high inflation and the onset of the election season.
Inflation hit a 62-month high in July at 8.3 percent on the back of a jump in the price of essential items like cooking oil, food, fuel and soap, squeezing household budgets and 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 firms have frozen salaries as they recover from Covid-19 economic hardships.
The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited (EABL) and Safaricom.
Many businesses want elections over before investing further, mindful of the weeks of post-election violence that followed the disputed 2007 presidential poll, which killed around 1,200 people and saw the economy take a nose-dive.
This dimmed expansion of factory floors that create new jobs and boost cash in circulation.
This year, the disputed vote has not been followed by violence.
Last week, the Independent Electoral and Boundaries Commission (IEBC) declared Deputy President William Ruto had won the election by a slim margin, but four out of seven election commissioners dissented, saying the tallying of votes had not been transparent.
The IEBC chairman, Wafula Chebukati, declared Dr Ruto the winner with 50.49 percent of the vote against opposition leader Raila Odinga’s 48.5 percent.
Mr Odinga has asked the Supreme Court to nullify the presidential election outcome on several grounds, escalating a political contest that has thrown investors into uncertainty.
“Businesses have been waiting to see the outcome of the election and now there is uncertainty due to the Supreme Court matter. There are delays in payments from end to end,” said a bank CEO, who did not wish to be named.
Businesses that tapped loans based on their projected cash flows are struggling to meet the loan obligations.
Mr Russo said lenders had stepped up recovery of the bad loans, intensifying property auctions.
Auctioneers say asset seizures are up this year, but they are having difficulties selling the assets in a market witnessing a glut of repossessed vehicles, land, homes and office equipment.
This underlines the cash crunch in the economy.
Joseph Gikonyo, the managing director of Garam Auctioneers, told the Business Daily that seized properties are mounting and lenders are turning to private treaties to sell the assets.
“More auctions have come into the pipeline but anything that has to be valued, including cars, machinery, houses and land, is hardly moving,” said Mr Gikonyo.
“At the moment only moveable assets like household goods which are fairly affordable are getting potential buyers if any. The situation has got from bad to worse.”
Commercial banks are shunning forceful auction of property seized from loan defaulters in favour of private settlement after Kenya’s soft economy slashed asset prices below the minimum bid value set in law.
Under private treaties, distressed borrowers agree with banks to look for the best available price for their properties and sell to repay loans as opposed to relying on the auctioneer’s hammer.
The move has given banks room to get around the Land Act 2012, which bars them from auctioning seized assets at below 75 percent of the prevailing market value.
Auctioneers are not selling as fast as they are repossessing due to the minimum bid price.
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