Bad loans rising in EA as economies slow down

Monday August 28 2017

As per the June 2017 Financial Stability, and Monetary Policy Committees statements, Kenya and Rwanda have the highest number of risky borrowers. FOTOSEARCH

By Allan Olingo

Regional commercial banks are feeling the weight of costly loans as a slowdown in economic growth and tighter regulatory requirements drive up the volume of non-performing loans.

In Kenya, this is coupled with the result of capped interest rates.

Banking data released by regulators and the region’s largest lenders shows that the volume of NPLs has been rising in the past year, as businesses and households struggle to meet their repayment schedules, weighed down by a credit crunch, high operational costs and tight controls in government spending in some countries like Tanzania.

Of the nine Kenyan banks that have released their 2017 half-year results, eight have recorded a rise in non-performing loans, a key indication that businesses are struggling not only to stay afloat but also to meet their financing needs.

Lending rates

Kenya’s lending rates averaged 13.71 per cent as at May, according to figures provided by the Central Bank — slightly below the capped rate of 14 per cent, and way above the Central Bank base lending rate of 10 per cent, which is what banks benchmark their interest on loans.


“We have seen our banking sector undergo numerous challenges; but we remain focused on acting as an enabler for financial progress to our clients despite these tough times,” said KCB Group chief executive Joshua Oigara.

KCB Bank, which is the region’s largest lender by assets, saw its first half 2017 NPLs rise to $316.3 million, from $313.5 million in 2016, partly attributed to the debt owed by struggling regional retailer Nakumatt and national carrier, Kenya Airways, totalling $295.1 million.

Equity Bank, which has operations in Uganda, Tanzania, Democratic Republic of Congo, South Sudan and Rwanda, recorded the highest rise in NPLs to $165.8 million in June 2017, up from $101.9 million last year.

“We are operating in a challenging banking environment, mostly as a result of the interest rate caps, which has limited our space to price for risk,” Equity Bank Group chief executive James Mwangi said at an investor briefing in Nairobi.

New CBK requirements, introduced by the Governor Dr Patrick Njoroge, have also played a part in the rise in NPLs. Loans are now officially classified as non-performing if they are not serviced for a period exceeding three months.


In Uganda, though NPLs declined to 6.2 per cent in June 2017, a surge in default rates seems to reflect big shocks experienced by borrowers and lenders since last year, in spite of bullish growth forecasts pegged to certain sectors.

Bank of Uganda executive director for research Dr Adam Mugume, said that there were significant default problems faced by the agriculture sector, particularly among sugar and maize farmers, caused by bad weather and diversion of funds last year.

“Some large borrowers in the sugar sector that invested in new production facilities, and many outgrowers suffered considerable crop losses due to the severe dry spell. Centenary Bank also reported a number of default cases in the Kapchorwa region who included maize farmers,” Dr Mugume said.

“Trade and commerce loans were largely affected by low consumer demand and shorter loan maturity periods.”

In June, BoU cut its key lending rate to 10 per cent from 11 per cent. BoU is using this tool to encourage more flow of credit to its private sector to spur the sluggish economic growth.

Economist at Stanbic Bank East Africa Jibran Qureishi, said although Uganda’s private sector recorded improved fortunes, the growth in manufacturing and retail was still sluggish.

“It is our hope that the activity in these two sectors will rebound as access to credit improves over the course of the year,” said Mr Qureishi.

Default rate

The trade and commerce sector recorded a default rate of 17 per cent at the end of June this year, after a record high of 9.6 per cent posted in December 2016.

Its NPL ratio dropped to six per cent in March 2017, as banks intensified loan recovery efforts.

A substantial number of bad loans captured in this segment were blamed on low sales volumes, delays in payment of goods supplied by Ugandan traders to the Government of South Sudan and cases of diversion of loan cash.

“Many people do not understand how loans work. They assume that loan money is personal cash and divert funds to less productive activities like paying rent for a residential house,” said Abraham Tigeikara, a mobile phone dealer.

“Some traders acquire new loans to repay old, expensive debt but their businesses are too weak to service fresh loans and they eventually find themselves stuck in a debt trap.”

Manufacturing sector

NPLs in the manufacturing sector accounted for a six per cent share of the industry total as at the end of June.

The sector’s NPLs peaked at 4.3 per cent in December 2016 before easing to 3.5 per cent at the end of March 2017, pegged on stronger collateral assets in form of land and factories and a recent shift from foreign currency to shilling denominated loans, analysts say.

“Low consumer demand has affected the trade and commerce sector. High default risks are also persistent in the retail mortgage segment but personal loans remain resilient,” said the head of financial markets at Standard Chartered Bank Uganda, Charles Katongole.

The share of NPLs linked to the building and construction sector totalled 16 per cent by close of June. Its NPL ratio peaked at 10 per cent in December 2016 before it declined to 5.6 per cent in March this year.

Personal loans

Personal loans accounted for 13 per cent of total industry NPLs in the period under review. The segment’s NPL ratio peaked at 4.4 per cent in March 2017 before it fell to 4.2 per cent in June.

“Personal loans came under pressure from a spike in default rates by members of parliament who borrowed money for election campaigns last year but lost their seats,

and the transfer of public employee payrolls from the Ministry of Public Service to individual ministries; some public servants defaulted on their loans in the absence of memorandums of understanding between banks and these ministries. The problem was however resolved before the end of 2016,” Dr Mugume said.


In Tanzania, the ratio of non-performing loans rose to 10.8 per cent at the end of April from 8.2 per cent a year ago. In August last year, audit firm KPMG raised the alarm noting that Tanzania’s NPLs were way above the country benchmark of 5 per cent.

In June, through its Central Bank, Tanzania announced new rules to help lenders withstand financial shocks.

“Banks and financial institutions shall be required to maintain a capital conservation buffer of 2.5 per cent of risk-weighted assets and off-balance sheet exposures.

The Bank of Tanzania has continued to implement prudential measures to strengthen risk management practices in the financial sector and has directed banks with high NPL ratios to formulate and implement strategies to bring the ratio to at most five per cent,” BoT said in statement.

Four months ago and as a monetary easing measure, BoT cut the minimum reserve ratio required of commercial lenders to 8 per cent from 10 per cent in March, as it angled to have the banks reducing borrowing costs.


The National Bank of Rwanda on the other hand said the ratio of NPLs to total loans increased to 8.1 per cent in March 2017, compared with 6.2 per cent a year ago, while that of micro finance institutions increased from 8.5 per cent to 11.7 per cent.

“We have seen the manufacturing, retail trade and hotel sectors leading in these non-performing loans. This rise is due to poor design of the funded projects, weak credit analysis and monitoring and poor implementation.

To contain this, we will be working with the banks to strengthen their credit underwriting and monitoring standards,” said Rwanda Central Bank Governor John Rwangombwa.

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