Costly loans amid declining economic performance pushed non-performing loans (NPLs) to Sh651 billion in 2023, affecting business operations as lenders increasingly turned to auctioneers to mitigate credit risks.
The Kenya Financial Sector Report 2023 estimates that NPLs rose from Sh503.2 billion in December 2022 to Sh651.8 billion in December 2023, accounting for 1.9 per cent of gross loans in December 2022 and 3.6 per cent in December 2023.
“This indicates that borrowers are facing difficulties in repaying their loans, while banks are tightening lending standards to mitigate credit risks,” the report stated, in a move that also explains the rise in the number of vehicles and goods seized by auctioneers.
The tough economic conditions in 2023 led to struggles for households and businesses, with many businesses closing, resulting in job losses and escalating poverty.
Due to loan defaults, banks resorted to auctioneers to recover funds, leading to a surge in auction advertisements in the dailies. The rise in NPLs also impacted banks’ annual audited profits before tax during the period.
Central Bank of Kenya (CBK) reported an 8.8 per cent decline in banks’ profit before tax in 2023, dropping to Sh219.3 billion from Sh240.4 billion the previous year. This decrease was primarily due to higher expenses than income, largely resulting from increased loan loss provisions.
Large peer group
“The profits before tax for the nine banks in the large peer group, which accounted for 84.7 per cent of overall profits before tax, declined in 2023, offsetting the increase in profit before tax for banks in the medium and small peer groups, resulting in a decline in the aggregate profit before tax,” it stated.
Large banks saw a 10.89 per cent drop in their profits before tax, from Sh208.3 billion in 2022 to Sh185.6 billion in 2023, while medium and small banks experienced increases of 2.58 per cent and 29.10 per cent, respectively.
Those of medium banks increased from Sh29.2 billion in 2022 to Sh29.9 billion in 2023 as that of small banks increased from Sh2.9 billion to Sh3.7 billion during the same period.
Other factors contributing to the decline in profits before tax in 2023 included the challenging business environment, increase in interest rates, decline in purchasing power and deterioration in the quality of assets.
Despite the decline, Kenya’s banking sector, exhibited resilience and stability in the year under review with the sector’s core and total capital increasing to Sh893.63 billion and Sh1,075.80 billion in December 2023, from Sh809.06 billion and Sh954.65 billion, respectively, in December 2022. The total net assets of banks also grew by 16.7 per cent, from Sh6.5 trillion in December 2022 to Sh7.6 trillion in December 2023.
According to the report, the main driver of growth in net total assets of banks was the strong growth in net loans and advances, which accounted for 49.4 per cent of the total net assets in 2023.
“The net loans and advances grew by 14.5 per cent in 2023 compared to 2022. The strong growth in loans and advances is very important for financial stability as it supports earnings, critical for capital build up,” it added.
Balances due from institutions abroad grew strongly to Sh516.2 billion in 2023 from Sh164.1 billion in 2022 reflecting the impact of exchange rate depreciation during the year and better return on deposits on account of increase in interest rates.