Commercial banks are recording a historic upswing in bad loans this year, signalling a deteriorating economic environment that has left many individuals and businesses sinking into default.

Leading lenders, including Equity, Co-operative, Absa Bank Kenya, and I&M Bank, have realised a rise in non-performing loans (NPLs) by between 29 per cent and 300 per cent since the year began.

This has dented the banks’ profitability since they are required to set aside cash or give loan-loss provisions to cater for potential defaults within three months as a means of maintaining liquidity and sustaining other lending activities.

Analysis of the financial statements of the Kenyan banks shows since January, eight of the 10 tier-one lenders had increased bad loans, except KCB and Stanbic Bank.

Equity Bank Kenya, the country’s most profitable bank, is the hardest hit by the defaults as its net NPLs more than quadrupled to reach Sh41.7 billion by the third quarter ending September 2023, forcing it to increase its loan-loss provisions.

It represents a 301 per cent NPL hike from Sh10.4 billion that Equity Bank had by January 2023, with the biggest increase noticeable between July and September when the country’s Finance Act 2023 – which had a raft of new tax measures and statutory deductions – came into force.

Bad loans by Absa Kenya also rose by 154.5 per cent to hit Sh11.2 billion, while that of I&M was 149 per cent up to Sh17.4 billion. The NPLs of Absa Bank and I&M were Sh4.4 billion and Sh7 billion, respectively, when the year started.

The rise in defaults, which Central Bank of Kenya (CBK) estimates to have reached a total of Sh612.5 billion in September, has been exacerbated by a mix of factors, including rising interest rates, depreciation of the Kenya shilling, and high inflation.

Difficult economic times

“It was a strategic decision to support and cushion our customers to fortify their opportunities for survival and enhance their resilience during these difficult economic times by absorbing part of the funding costs and keeping yields on loans and government securities at almost the same level,” Equity Group CEO, James Mwangi, said during quarter three investors briefing.

Other large banks such as Standard Chartered Bank, Co-operative Bank, Diamond Trust Bank (DTB), and NCBA realised relatively small increases in NPLs by 38 per cent, 28.9 per cent, 15 per cent, and 11 per cent, respectively.

Among the 10 tier-one lenders, only Stanbic Bank and KCB – Kenya’s biggest bank by asset – recorded a decline in bad loans.

KCB had the biggest drop by 15 percent from Sh56.3 billion to Sh66.4 billion across the nine months, but this was weighed down by its local subsidiary, the National Bank of Kenya (NBK), which realised a 38 per cent increase in NPLs to Sh8 billion.

“Sustained drop in NPL ratio driven by improvement in tourism and transport sectors. NPL stock increase due to downgrade in the period and FX (Foreign Exchange) impact,” KCB stated in the investor presentation last month.

The rise in interest rates, which fluctuates in line with the Central Bank Rate (CBR) – currently at a historic high of 12.5 per cent – has made it costly for businesses and households to access loans and repay on time.