The number of businesses and households struggling with loan repayments is still on the rise, denting the income of commercial banks amid costly lending rates that is hurting the economy.

The rise in the cost of credit is partly linked to the tightening of monetary policies which last week saw a hike in the benchmark Central Bank Rate (CBR) by 75 points to 9.5 per cent.

According to the Central Bank of Kenya (CBK), the ratio of gross non-performing loans (NPLs) to gross loans stood at 14 per cent in February compared to 13.3 per cent in December 2022. NPLs are loans that are unlikely to be repaid in full or subjected to late repayments.

Despite this NPL increase, which always exposes banks to losses, CBK maintains that the banking sector is strong and resilient, with most lenders boasting impressive profit growth for the full year ending December 2022.

Market perception

“It (NPLs growth) is because of difficulties some of these borrowers are having in their own sectors. These are sort of economic difficulties which once can also relate to the responses we receive from the CEOs survey and market perception survey,” says CBK governor Patrick Njoroge. Between last December and February, NPLs were recorded higher in the transport and communication sector, at a 16.5 per cent ratio to gross loans, according to CBK, the government’s fiscal agent.

This is closely followed by the manufacturing sector (15.2 per cent), consumer durables (12.4 per cent), and trade (11.8 per cent).

The jumbo CBR rate hike is seemingly a shot in the government’s own foot since it is likely to make government paper costlier amid plans by the current administration to source 50 per cent of debt from the domestic market in the upcoming 2023/24 fiscal year.

However, the hardest impact will be felt by the private sector borrowers who will be jolted by the ripple effect of the increased costs of bank loans. The higher cost of loans risks locking out businesses from accessing the credit they need for expansion, something that could eventually limit their lifespan and ability to create more jobs.

Other than the principal amount, banks always consider the benchmark rate when determining how much to charge a particular borrower, plus other factors like risk premiums, taxes, levies, and transaction costs. Lenders have already started reacting to the CBK’s decision led by KCB, which last week informed customers that it will hike KCB M-Pesa loan fee from 8.75 per cent to 8.79 per cent. NCBA, another financier with M-Pesa facility, is also expected to review its loan charges this week.

A credit repair framework announced by CBK last November, which targeted over 4.2 million digital loan defaulters, will end next month after attempts to improve credit uptake in the private sector.

Under the framework, lenders including microfinance banks and mortgage finance companies were expected to provide a discount of at least 50 per cent on the outstanding digital loans.

Loan applications

However, CBK noted that between December 2022 and February 2023, the number of loan applications and approvals still declined, reflecting reduced demand.

“We expect the banks and borrows will work to ensure the borrowers actually remain current as much as possible with their loans. That (NPLs) will reduce as the situation normalises,” said Njoroge.