Commercial banks across East Africa are feeling the weight of costly loans as a high interest rate regime coupled with new regulatory requirements drives up the volume of non-performing loans (NPLs).

Banking data released by regulators and several big banks in the region shows that the volume of NPLs has been rising over the past nine months, as businesses and households struggle to meet their repayment schedules, weighed down by a mix of high interest rates and reduced government spending in the first half of the year.

Lending rates in Kenya currently average 16.96 per cent — the lowest level since October 2011 — a level analysts consider to still be high given that at at 8.5 per cent currently, the Central Bank Rate is half that figure. The CBR is what banks should benchmark their interest on loans.

READ: Era of cheaper money here as rates hit two-year low

Latest data by central banks in Kenya, Uganda, Rwanda and Tanzania, however, shows that the ratio of NPLs to total loans is declining, albeit slowly.

The CBK said on Wednesday the figure declined from 5.3 per cent in August to 5.2 per cent in September, an indication of lower credit risk.

New CBK requirements have also forced the country’s lenders to increase their NPL figures in light of loan grading standards introduced by the regulator. Loans are officially classified as non-performing if they are not serviced for a period exceeding three months.

Data from the Bank of Uganda (BoU) on the other hand shows NPLs continued on a downward trend, to 3.9 per cent of total loans in the last quarter of the 2012/13 fiscal year, from 4.7 per cent the previous quarter.

READ: Ugandan banks brace for higher loan defaults, drop in profits

Rwanda ratios

In Rwanda, the central bank — the National Bank of Rwanda (NBR) — said the ratio of NPLs to total loans increased slightly to 6.9 per cent at the end of June this year compared with 6.7 per cent and 5.8 per cent at the end of December 2012 and June 2012 respectively. 

The Bank of Tanzania, on the other hand, said the ratio of NPLs to gross loans decreased to 7.8 per cent in March this year from 8.3 per cent in June last year. 

Bankers say that aid cuts in Rwanda and Uganda, as well as the March general election in Kenya, affected the government payment cycle, forcing a sizeable portion of the region’s SMEs to revise their loan repayment schedules.

In Rwanda, for example, interest rates started on the high end this year, as government turned to domestic borrowing to bridge the shortfall in donor funding.

“There will be a spike this year — the payment cycle of government contracts was extended slightly in the first quarter and, therefore, many people did not catch up,” said Lawson Naibo, the chief operating officer of the Bank of Kigali.  

Regional lenders Equity and KCB reported a rise in NPLs, largely driven by their subsidiaries outside Kenya.

KCB said its share of NPLs to total loans rose to 7.6 per cent in the third quarter ending September, from 5.9 per cent last year. On Tuesday, Equity said its NPLs grew 16.1 per cent quarter on quarter for the three months ending September.

Equity Bank chief executive James Mwangi attributed the rise in NPLs to the delayed payment by SMEs, which form the bulk of its customers, by the state and new regulatory guidelines.

For the National Bank of Kenya, high NPLs attributed to unsecured loans, have seen it receive a bailout from the government. Last year, the ratio of NPLs to total loans and advances was 7.3 per cent, almost double the industry average of 3.7 per cent.

“We believe this carries a risk to NBK’s asset quality,” said analysts at Sterling Research, a Kenyan brokerage firm.

READ: Kenyan banks grapple with growing list of defaulters

The rise in NPLs is expected to put pressure on banks to be more cautious in lending as well as tighten the noose on borrowers already holding loans.

Projections by the CBK in a credit survey released Wednesday shows that most banks intend to intensify loan recovery efforts especially in the personal/household, transport, tourism and building sectors in the current quarter ending December.

Bankers, however, expect NPLs to increase in the personal/ household loan category, while declining in the trade, tourism, building and transport sectors. 

In Uganda, while the level of non-performing assets has declined slightly, the loan book for most banks has picked up slightly.

Uganda NPLs

“Loan repayment is stable; the level of non-performing loans is also stable, meaning we are no longer seeing an increase in the level of NPLs,” said Nicholas Okwi, the managing director of Housing Finance Bank Uganda.

Charles Augustine Abuka, the director for financial stability at the BoU, said that, as a result, there has been a slight improvement in asset quality for banks over the quarter ending June 2013.

In Uganda, total credit extended by banks stood at Ush7.6 trillion ($2,98 billion) as at the end of June 2013, representing 6.4 per cent growth during the year.

“The growth in lending was mainly driven by the increase in foreign currency denominated loans, which rose by 20.1 per cent in June 2013 although this was lower than the expansion of 34.9 per cent recorded in June 2012,” said Dr Abuka.

In Rwanda, the country’s central bank wants the industry to maintain a NPL ratio of 5 per cent. During the first half of this year, new authorised loans amounted to Rwf220.5 billion ($366 million), rather lower than the Rwf251.7 billion ($418 million) recorded in the first half of 2012.

This slowdown was mainly due to commercial banks moving to enhance risk management, following an excessively high increase in credit distribution in 2012.  

Generally, while banks are likely to resume lending, interest rates are likely to remain high as demand for credit continues to exceed supply.

By Martin Luther Oketch, Peterson Thiong’o, Berna Namata and Rosemary Mirondo