The value of non-performing mortgage loans in Kenya reached a record high of Sh40 billion in December 2023 on the back of high interest rates and tough economic conditions faced by borrowers.
The value of non-performing loans (NPLs) by mortgage lenders rose by eight per cent or Sh3 billion last year, capping a tough two years for the sector, newly released central bank data showed.
The sector’s non-performing loan ratio has been extremely low for a decade. The deterioration of the mortgage book over the past two years has forced lenders to repossess partially paid-off homes and auction them off to recoup their money, while others have entered into private agreements with borrowers to sell the properties as a softer alternative to direct auctions.
Defaults stood at Sh40.8 billion, equivalent to 14.5 percent of the outstanding mortgage loan book of Sh281.5 billion at the end of 2023. In 2022, the default rate stood at 14.4 percent – Sh37.8 billion of loans worth Sh261.8 billion.
The continued rise in interest rates since 2022 has hit those with variable rate mortgages hard, at a time when households were already facing pressures on disposable income due to high inflation and a weak exchange rate that has increased the cost of goods and services in the country.
The data shows that 88.4 percent of mortgage loans – equivalent to Sh249 billion – were at variable interest rates in 2023, meaning their monthly repayments rose every time banks adjusted their rates to match base rate hikes imposed by the central bank in its fight against high inflation and a weak exchange rate.
Since January 2022, the Central Bank of Kuwait has raised interest rates seven times, with the central bank rate rising from seven percent to 13 percent during this period.
The Central Bank of Kuwait said in its annual report on the banking sector for 2023, which was published yesterday, that the average interest rate on real estate loans in 2023 amounted to 14.3% and ranged between 8.7% and 18.6%, compared to an average of 12.3% and a range of 8.2% to 17% in 2022. The rise in average rates was consistent with the rise in interest rates in the year.
In 2023, the average mortgage size was Sh9.4 million, unchanged from 2022, meaning that a Sh3 billion increase in non-performing loans equates to 320 mortgages defaulting.
The total number of mortgages in Kenya stood at 30,015 by the end of 2023, up from 27,786 in December 2022.
This number of loans is considered low in a country where demand for housing exceeds supply, with a growing middle class choosing instead to rent or build their own homes without the facilities associated with a mortgage.
Factors identified by banks as barriers to mortgage uptake include relatively low income levels among potential home buyers, the high cost of purchasing property, limited access to affordable long-term finance, and high incidental costs in terms of stamp duty, legal fees and valuation fees.
Tough economic conditions have also contributed to the slow pace of mortgage take-up, even after the introduction of relatively affordable long-term funds through initiatives such as the Kenya Mortgage Refinance Corporation.
Defaults on loans have been on the rise across key sectors of the economy, including trade, manufacturing, real estate, personal and household loans. As of December 2023, the total non-performing loans (NPLs) to total loan portfolio in the banking sector stood at 15.6%, equivalent to Sh651.8 billion in NPLs.
At its last Monetary Policy Committee meeting on June 5, the central bank said the non-performing loan ratio rose to 16.1% in April 2024, the highest level in 18 years.
Central Bank data in the Banking Supervision Report indicates that by the end of December, the trade sector topped the volume of non-performing loans at Sh137 billion, representing 21% of the total loans provided to the sector by banks.
This was followed by the manufacturing sector with Sh135.2 billion of NPLs (NPL ratio 20.7%), while real estate contributed Sh111.5 billion of NPLs, equivalent to 17.1% of the sector’s loan book.
Meanwhile, the value of non-performing loans for the household and individual sector amounted to Sh92.03 billion, equivalent to 14.1 percent of the total loans contracted in this sector.
Overall, the four sectors accounted for 73% of the banking sector’s exposure to non-performing loans. The central bank attributed this to delayed repayments of loans from the public and private sectors, slow occupancy of residential units, and a difficult business environment.
