By Allan Olingo

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The private sector in East Africa is facing diminishing credit as commercial banks continue to shun small businesses and households.

As at September last year, Kenyan, Ugandan and Tanzanian commercial banks reported a rise in non-performing loans (NPLs), with Tanzania registering the highest amount at 12.5 per cent — a three-year high from 6.8 per cent at the end of 2014 — followed by Uganda at 7.2 per cent.

Now the Bank of Tanzania (BoT) has proposed a raft of measures it hopes will reverse the current negative growth in the private sector credit and contain the rise in bad loans.

“Banks and financial institutions are required to develop and maintain specific strategies that will see improved credit granting process and reverse the NPL trend,” said BoT deputy governor responsible for financial stability and financial deepening Dr Benard Kibesse in a circular sent out on February 19, and which The EastAfrican has seen.

Measures

The proposed measures include the new requirement for quarterly reporting for banks and financial institutions.

The EastAfrican understands that BoT has waived certain provisions of the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014 (the Banking MRA Regulations) for a three-year tenure up to the end of 2020 in order to provide relief.

The regulator has also permitted banks to restructure NPLs up to four times, from the previous limit of two. However, the banking institutions will have to demonstrate that the affected borrowers have a good track record of repayment but lack working capital to support their business.

BoT has also waived section 7 (2) of the Banking MRA Regulations, which will allow banks to upgrade term loans to a better classification category once the borrower has paid two consecutive loan instalments — an improvement from the previous four consecutive instalments.

BoT has also withdrawn its 2015 directive which allowed banks to write off credit accommodation that remained in the loss category for more than 12 consecutive quarters. Now banks can write off NPLs that have remained in the loss category for more than four consecutive quarters.

Gradual recovery

Tanzania credit to private sector by banks continued to recover gradually owing to measures implemented to address credit risk and accommodative monetary policy.

“In the year ending January 2018, bank credit to the private sector grew by 2.0 per cent, slightly higher than 1.7 per cent, the preceding month buoyed by growth in lending to manufacturing of 14.6 per cent followed by personal loans at 12 per cent,” the Central Bank February economic update notes.

In Kenya, non-performing loans rose $470 million to $2.59 billion in the year to December 2017, exposing the negative effect that last year’s electioneering had on the economy.

In the latest credit officer survey report for the quarter ending December 2017, Kenya’s Central Bank said that the period was marked by a slowdown in business activities, which ultimately affected the ability of businesses to service their loans.

The ratio of NPLs to gross loans rose to 10.56 per cent, from the 9.1 per cent at the end of 2016.

In Uganda, though NPLs declined to 6.2 per cent in June 2017, a surge in default rates experienced within major economic segments seems to have reversed this, seeing a record high of 7.2 per cent as at the end of September 30, the Bank of Uganda (BoU) statistics show.

The rise in the NPLs to the quarter ending September last year reflect big shocks experienced by borrowers and lenders since last year in spite of bullish growth forecasts pegged to certain sectors.

Uganda has also witnessed a private sector credit slowdown, which stood at 5.8 per cent in September, down from 6.1 per cent posted in March, BoU data shows.

“There were significant default problems faced by key sectors including agriculture, services and construction, which saw trade and commerce loans largely,” said BoU’s executive director for research, Dr Adam Mugume.