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Seth Onyango @SethManex

Banks and small lenders have ramped up repossession of distressed assets from defaulters as the local auction market records a sharp spike in delinquent properties.

Business Hub has learnt that more properties including houses and buildings at prime locations are falling into fore closures as owners fail to service their loans.

This is in sharp contrast to corresponding years where household items like TVs, fridges, radios and furniture made up the bulk of asset seizures.

Data from the Central Bank of Kenya (CBK) indicates that the property market has been recording the highest growth in non-performing loans (NPLs) with no respite in the current economic climate.

“The real estate sector registered the highest increase in NPLs by Sh6.1 billion (15.8 per cent) due to slow uptake of housing units,” it indicated in its Quarterly Economic Review.

Experts argue that the influx of distressed assets flooding the market could be a symptom of an over-collateralised banking sector, unfavourable economic climate or reckless borrowing.

University of Nairobi economics lecturer Samuel Nyandemo blamed the deteriorating quality of borrowing to hard economic times that has made it difficult for people to service loans.

Ordinarily, he said the real estate segment becomes the biggest casualty in the prevailing conditions due to heavy borrowing and investment in the sector amid constrained tenancy.

Debt risk

“We can see a lot of heavy investment in the real estate which has created a glut…you have houses and buildings with no one to occupy them,” he told Business Hub, adding that currently there is a high debt risk in the financial market.

To avoid a breakdown in the lending market, Nyandemo said the government must fix the economy and create conditions that enable borrowers to service their loans.

Weighed down by toxic loans, lenders have, in a bid to seal holes in their balance sheets, stepped up seizures of distressed assets from defaulters. However, lenders are still unable to ease their toxic debt hangover through auctioning of assets amid claims Kenyans are broke.

It comes amid claims that banks are over-loaning to grow their balance sheets and resort to auction off collateral and seized properties from their customers to recover their money.

It has emerged that these lenders are in limbo as majority find it hard to recover assets through auctions.

“Banks are getting a little greedy going for as many as possible who can net loans, but they are trying to shield themselves from the collapse that they saw in the US by asking clients to provide collateral,” says William Odhiambo, managing consultant at Elim Consulting.

A standard explanation from borrowers is that these are tough times for the economy thus they are not able to pay, a view Odhiambo tends to agree with.

But financial expert Patrick Wameyo say the scenario could be a result of auctioneers advertising more and more and has, therefore, nothing much to do with the banks.

Other methods

He says the situation is not as bleak as the auction market has made it to look.

“As a culture in the banking system, auctioning is only used as the last resort. There are other methods used to get clients to adjust their reduced payment capacity to repay their loans,” he explained.

He said auctioning as a tool has not worked in any financial institution unless clients show they are not interested in paying loans.

According to Leakey’s Auctioneers, the number of delinquent properties going under the hammer has soared astronomically as more burrowers default on bank loan payments.

“The reality is that majority of Kenyans are not able to repay their loans. I do not want to speculate the reason but your guess is as good as mine,” said Leakey’s George Muiruri.

Wameyo says the explanation for any growth in NPLs is beyond the circumstance of the borrower, where they lose jobs and more to do with people borrowing with the intention not to pay.

However, flipping through local dailies, there are more auction-dominated pages as desperate lenders try to seek buyers of repossessed properties.

While this spells doom for defaulters, it heralds good news to interested buyers as they are likely to purchase property and cars affordably at auctions.

The biggest advantage of buying property at auctions is that one gets it for a price normally below the market rate.

These assets are put for auction at about 30 per cent discount or more to the prevailing face value.

As customers swarm the market for cheaper goods, the development has given brisk business to estate agents and auctioneers who are now making a killing from defaulters’ misfortune.

For banks and lenders to ease their toxic loans, Odhiambo says, they need to tighten their lending regulations, which he says is also counterproductive.

“Banks can restrict themselves from clients that have an income, but that harms the economy further because there will not be enough money in circulation much as it should,” he explained.