Kenya’s banking sector faces a significant challenge as loan defaults soar to a record high of Sh634 billion, marking a 26% increase over the past year, according to data from the Central Bank of Kenya.
This surge in non-performing loans, amounting to an additional Sh129.8 billion within just one year, reflects the strain on the economy and its impact on banks’ profitability. The default rate climbed to 15.3% by October 2023, up from 13.8% in the same period in 2022.
The economic downturn is further evident in the Purchasing Managers Index survey, which indicates sustained contractions in the business environment for the majority of the previous year.
In response, banks have increased provisions for bad loans, with tier-one lenders allocating Sh55.57 billion in the first three quarters of 2023—an increase of 48% compared to the previous year.
Despite these measures, banks have seen a slight decline in profitability, with profit before tax dropping to Sh199.6 billion from Sh204.7 billion in the same period of 2022. Manufacturing emerges as a significant contributor to the surge in defaults, underscoring sector-specific challenges.
Looking ahead, concerns remain as 45% of lenders anticipate a further rise in defaults in the coming months. Bank executives emphasize the need for intensified recovery efforts, particularly in households and trade, to safeguard asset quality.
The surge in loan defaults highlights the urgent need for concerted efforts to address economic challenges and promote sustainable growth in Kenya’s banking sector.
By: Montel Kamau
Serrari Financial Analyst
26th January, 2024
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