Non-performing loans (NPLs) in Kenya’s banking sector shot up by 13.33 per cent last year due to the prevalence of high interest rates.

The Central Bank of Kenya (CBK) on Tuesday said that gross non-performing loans had risen to Ksh61.57 billion ($716.25 million) as at end of December 2012 from Ksh54.33 billion ($638.66 million) at the beginning of January 2012 in line with expectations that provisions would go up during the period.

Gross loans expanded by 12.40 per cent to Ksh1.36 trillion ($15.82 billion) as at December last year from Ksh1.21 trillion ($14.22 billion) in January.

“In the first quarter of 2012, in an environment of high interest rates, banks had an expectation that NPLs would rise. In the second half of the year, there was an expectation for a drop in NPLs which coincided with the fall in the Central Bank Rate (CBR) from a high of 18 per cent in June 2012,” said CBK in its credit survey released on Tuesday.

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The banking regulator said that in the fourth quarter of last year there were new expectations of increased NPLs in the first quarter of 2013 in the trade, tourism, transport and communication, and real estate sectors as a result of increased political risk arising from March elections.

CBK said that as a proactive measure, some institutions indicated their intention to intensify their credit recovery efforts in the first quarter of this year to curb any form of negative outcomes caused by the March election as well as to recover any non-performing loans arising from the high interest rate regime experienced by the sector.

The survey included 42 banks which responded to the banking regulator's survey which shows that the drop in the CBR from 18 per cent in June 2012 to 9.5 per cent in January this year which resulted in a decrease in the cost of borrowing had the most significant impact in increasing demand for credit.

The total percentage of loans to total assets was 57.8 per cent as at the end of December last year and the aggregate balance sheet of the banking sector rose by 14.72 per cent to Ksh2.354 trillion ($27.38 billion) from Ksh2.052 trillion ($24.12 billion) in January 2012.