Commercial banks reduced their lending to semi-governmental institutions by 14.7% in July compared to the same period last year, the largest decline in four years. This comes as state-owned companies struggle to service debts owed to their largest lender, the government.
Overall, commercial banks, microfinance banks and savings and credit cooperatives (SACOs) provided syndicated loans worth Sh78.9 billion to parastatals in July, a 14.8 per cent decline from the Sh92.5 billion they extended to institutions during the same period last year. Which was an increase over the previous period.
Most of this debt is owed to commercial banks, which extended loans worth Sh78.2 billion in July, compared to Sh91.7 billion last year, according to the latest data from the Central Bank of Kenya (CBK).
The decline came amid rising defaults among parastatals on state loans, which may have prompted private sector lenders to increase their loan books to state-owned enterprises, many of which are also facing financial difficulties with dwindling revenues and profits.
Last year, 31 out of 54 state-owned enterprises did not make any payments to service their debts to the state, and the majority applied to have their loans written off by the government during the 2022/23 fiscal year, an indication of the financial problems they are facing.
Amid these difficulties, the Central Bank of Kuwait, the banking sector regulator, urged banks in 2022 to slow down lending to quasi-government institutions, saying that borrowing them primarily for recurring expenses threatens their viability and could put banks at risk.
“State-owned enterprises have used long-term debt to finance operations expenses rather than investments to generate revenues to service future debt. This limits the productivity, capacity and profitability of state-owned enterprises and thus their ability to survive,” the regulator said.
Banks subsequently reduced their lending to parastatals by 3.5 percent, from Sh78.6 billion at the beginning of the year to Sh75.8 billion at the end of the year.
However, they began increasing their loans to state-owned enterprises again in 2023, reaching a high of Sh107.9 billion in October last year, before starting cuts again.
The latest data from the Treasury indicates that amid falling credit from banks, parastatals have resorted to borrowing from the state, which guarantees their debts and lends them from the Treasury.
In the financial year ending June 2024, loans to state-owned enterprises from the government rose by Sh231.2 billion to Sh1.26 trillion, highlighting parastatals’ increasing dependence on the treasury to survive.
In contrast, bank lending to states and county governments rose over the same period, following rising interest rates that led to many private sector players avoiding credit.
During this period, commercial bank loans to the government rose by 10.4 per cent to Sh1.9 trillion, while loans to relocating units rebounded from decline to record 21 per cent growth to Sh6.5 billion.
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