Kenyan banks exposed to bad loans danger: IMF

Thursday February 05 2015

Kenyan banks are not setting aside enough cash to shield themselves against the growing mountain of bad debts, the International Monetary Fund (IMF) has warned, echoing recent concerns expressed by the Treasury.

The IMF, the global lender of last resort, says in its latest statement that although Kenyan banks are profitable and well-capitalised, failure to adequately provision for bad loans is raising eyebrows.  

“The banking sector remains profitable and well-capitalised but provisions are lately lagging behind a pickup in non-performing loans (NPLs),” the IMF said in a statement issued on Tuesday.

Under-provisioning for bad loans helps banks to report better profits but exposes them to financial difficulty and even possible collapse in the event a large number of borrowers fail to meet their debt obligations.

The latest Central Bank of Kenya (CBK) data shows that non-performing loans rose by 30.9 per cent last year to Sh107.1 billion in December — the highest in six years.

The steep rise in the mountain of bad loans is linked to poor performance of the tourism sector that has been hit by last year’s wave of insecurity concerns, a slowdown in agricultural exports and the government’s delay in paying contractors.


The persistence of high interest rates in an economy where incomes have remained nearly static for the past five years is also seen to have contributed to increased defaults.

Kenya's Treasury has in this year’s budget policy paper asked the central bank to be more stringent in its monitoring of banks to ensure adequate provisioning for bad loans.

“The central bank will review and strictly implement the Prudential Guidelines on risk classification of assets and provisioning, and regularly report progress,” the budget statement says.

Banks will also be required to provide detailed information on loans that were restructured monthly as well as data on loan-loss recovery rates.

Restructuring of a loan refers to changing the repayment terms in order to introduce a grace period or extending the tenure of the credit in order to retain it in the good loans book.

Treasury secretary Henry Rotich said the concerns largely arose from the construction industry where there had been a noticeable rise in bad loans but was expected to recover with payment of contractors.

“Some of the banks were not providing as per the guidelines because of assurances that the government would pay,” said Mr Rotich.

Banks are required to set aside an amount equal to loans that have not been serviced for more than six months — termed doubtful loans.

Besides, the lenders have to set aside cash equivalent to 20 per cent of loans whose instalments have not been paid for three to six months (also known as sub-standard loans) and three per cent of those that have not been serviced for between one and three months.     

Analysts concur with the IMF that a number of the lenders’ provisioning for bad loans stand below the CBK requirements.

“Most will need to increase their level of provisioning to reflect the true picture of the quality of their loan books,” said Vimal Parmar, who heads research at Burbidge Capital.

A report by Citi Bank released in 2012 indicated that six Kenyan lenders classified as large banks were under-provisioned by more than Sh20.8 billion.

Since the publication of the report, which also signalled possible manipulation of government securities, the CBK has taken several measures to strengthen financial reporting by the banks.

The financial sector regulator now requires lenders to classify as non-performing all loan accounts of a borrower who fails to service any one of their multiple loans for more than three months.

READ: Banks feel the heat of new CBK order on bad loans

The lenders are also required to continue classifying a loan as non-performing until six instalments are paid in a row. Previously a single payment would see an account reclassified as performing even though the borrower could again default.

Beginning this year, banks were to increase the statutory capital ratios by a margin of 2.5 percentage points, a move that is thought to offer them a capital buffer against economic shocks.

The Treasury has also asked the central bank to conduct a survey of commercial banks’ exposure to mortgages and to take remedial actions to address any vulnerabilities.

Kenya is in the process of forming an apex body, dubbed Financial Stability Council, to oversee the strength of the industry.

The establishment of the council is informed by the global financial crisis of 2010 that exposed how vulnerable economies, including the more sophisticated ones, are to banking sector challenges.

Kenya’s banking industry has established itself as the most profitable sector, with the banks’ incomes having grown 13.7 per cent last year to Sh141 billion compared to Sh124 billion a year earlier.

READ: Economists sound the alarm over EA’s rising public debt

The growth was largely attributed to increasing appetite for loans among borrowers that expanded the lenders’ loan books by 22.8 per cent to Sh1.97 trillion.

The IMF has also asked the CBK to be cautious of the increased loan uptake which usually has the impact of veiling growth of non-performing loans as a ratio of total loans.

“[The] IMF recommends that the CBK should remain vigilant and act as needed to head off any pressure from rapid credit growth and the envisaged scaling up of infrastructure spending — potentially by raising interest rates,” said the international lender of last resort, which extended Kenya a $688 million standby loan facility on Tuesday.