NAIROBI, Kenya – The high cost of living, exacerbated by weak currency and global supply chain disruptions, has led to a significant increase in non-performing loans (NPLs) for Kenyan banks.
In 2023, banks recorded an additional Sh150 billion in bad loans, pushing the total to Sh651.8 billion, according to the latest Banking Supervision Report released by the Central Bank of Kenya (CBK) on Thursday.
The report highlights that the deterioration in banks’ asset quality was the most severe in the past five years, marking an almost 30 percent increase from the previous year.
Gross non-performing loans stood at Sh503.2 billion in 2022, illustrating a worrying trend in the banking sector’s health.
NPLs were predominantly concentrated in the Trade, Manufacturing, Real Estate, and Personal and Household sectors, which collectively accounted for 72.9 percent of total loan defaults.
Traders emerged as the primary defaulters, contributing to 21 percent of all bad loans, valued at Sh137 billion.
This spike was attributed to a volatile business environment where the dollar’s cost exceeded Sh160, inflating import expenses.
The Manufacturing sector followed closely, with defaults amounting to Sh135.6 billion, representing 20.7 percent of total NPLs.
The Real Estate sector, significantly impacted by economic turbulence, saw its contribution to the country’s GDP drop by 38 percent, resulting in Sh111.5 billion in loan arrears.
Personal and household loans, spanning over 12 million accounts, reported defaults totaling Sh92 billion, making up 14.1 percent of the gross non-performing loans.
The CBK has expressed deep concern over the sharp rise in bad loans and is collaborating 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.
Despite the rise in NPLs, banks expanded their loan portfolios from Sh3.6 trillion to Sh4.08 trillion.
However, the quality of these assets declined, as indicated by the increase in gross NPLs to gross loans ratio, which rose to 15.6 percent in December 2023 from 13.9 percent in December 2022.
The Core Capital to Total Risk-Weighted Assets ratio slightly decreased from 16.1 percent in 2022 to 15.4 percent in 2023.
Similarly, the Total Capital to Total Risk-Weighted Assets ratio fell from 19 percent to 18.6 percent.
The Core Capital to Total Deposits ratio also saw a marginal decline to 16 percent from 17.2 percent the previous year.
Despite these decreases, the CBK confirmed that the Kenyan banking industry remained fully compliant with capital adequacy ratios in 2023.
The average liquidity ratio improved slightly to 51 percent by December 2023, up from 50.8 percent in December 2022.
This improvement was mainly due to a higher growth in total liquid assets compared to the growth in short-term liabilities.
The banking sector’s profitability took a hit, with profit before tax dropping by 8.8 percent to Sh219.2 billion from Sh240.4 billion in 2022.
The decline was attributed to a higher increase in total expenses (Sh175.3 billion) compared to the rise in total income (Sh154.1 billion).
Despite the challenges, the total income for the banking sector grew by 20.7 percent to Sh899.3 billion in December 2023 from Sh744.8 billion in December 2022.
This increase was driven by higher interest on placements (166.3 percent), advances (29.7 percent), other fees and commission income (22.9 percent), and interest on government securities (11.5 percent).
The banking sector’s total assets grew by over Sh1 trillion, reaching Sh7.7 trillion in 2023 from Sh6.6 trillion in the previous financial year.
