In a yard in Nairobi, cars are piled up waiting for bids at auctions where there have not been enough buyers recently, a growing problem in Kenya as loan defaults hit a new 18-year high in August.
The resilient economy and expensive loans have created a growing number of distressed borrowers whose assets, from homes to cars and furniture, are being seized by aggressive banks.
Data released by the Central Bank of Kenya (CBK) shows non-performing loans (NPLs) reached a record high of Sh674.9 billion in August from Sh657.6 billion in July and Sh621.3 billion at the start of the year.
The rising defaults reflected economic challenges for both businesses and households, resulting in declining sales and slowing activity – leading to job cuts, lower wages, losses and business closures, which ultimately made it difficult for households to repay their loans in a timely manner.
This has led to higher property auctions and the negative listing of thousands more people with credit reference bureaus (CRBs), damaging debtors’ chances of being able to borrow more.
The share of non-performing loans in the banking sector rose to 16.7 percent in August, and remained in the double digits for months and at levels last seen in April 2006, the central bank said.
Joseph Gikonyo, CEO of Garam Auctions, reports there is an abundance of restored cars, land, homes and office equipment, which are being sold at a cheap price.
“The market is saturated with homes, commercial buildings, repossessed cars and office furniture. Distressed borrowers are cutting across the board. Every day, we are repossessing cars and catching up with properties left, right and centre,” Mr. Gikonyo said.
“While there has been an increase in the number of properties up for auction, there has been a corresponding decline in the absorption of these assets. In fact, the absorption rate is at a historic low.”
Stockyards of confiscated property are believed to have mushroomed in Nairobi and across the country with auction rounds increasing every month.
“I would say the business thrives even when it becomes saturated because Kenyans usually copy successful companies,” said Gikonyo, while suggesting new entrants into the auction business.
Industries and other businesses have frozen their activities in response to the slowdown in the economy, leading to job cuts as profitable companies report lower profits.
This has resulted in workers who have taken advantage of mortgages and unsecured loans to purchase items such as furniture, cars and expenses such as school fees falling behind in a business environment as their monthly take-home payments have been reduced due to increased fees.
Workers’ wages decreased after the imposition of the housing tax, which is equivalent to 1.5 percent of the monthly salary. The insurance tax will also rise this month after a 2.75 percent increase in the monthly wage for universal health coverage.
Unsecured loans are given on the basis of salary.
Companies that borrowed based on cash flow projections are also struggling to repay their bank loans.
On Wednesday, the central bank lowered its growth forecast for 2024 to 5.1 percent from 5.4 percent after growth slowed in the second quarter.
Kenya’s private sector saw a slight deterioration in business conditions in September as output and new orders contracted again, reversing the brief recovery seen in August, Stanbic Bank reported on Thursday.
The Stanbic Bank Kenya PMI fell to 49.7 in September from 50.6 in August, falling below the 50.0 threshold that separates growth from contraction and marking the third decline in four months.
“Business conditions contracted slightly in September, meaning the rebound in August was due to some recovery after disruptions caused by protests earlier this year,” said Christopher Legilisho, economist at Stanbic Bank.
Delays in payments, particularly for public sector supplies, stifle small businesses and make it difficult for entrepreneurs to service loans.
Bank credit has also dried up as lenders worry about a further rise in bad loans in the wake of expensive credit and lower economic activity.
Credit demand growth slowed to 1.3% in August compared to a 3.7% increase in July, the lowest level since 2017 when Kenya imposed controls on lending rates, reducing the supply of loans.
The Central Bank of Kuwait believes that credit growth of 12 to 15 percent will be sufficient to support healthy growth of the economy.
The high cost of borrowing has discouraged borrowers from availing loans in an economic environment where demand for products is sluggish, forcing companies to freeze hiring and expansion plans.
This has hurt refinancing of seized products since auction buyers rely on loans to snap up homes, which partly contributed to the glut.
On Tuesday, the Central Bank of Kuwait cut its benchmark interest rate by the largest margin since the start of coronavirus-induced economic difficulties in March 2020, signaling relief for borrowers struggling with expensive loans and reversing a slowdown in credit demand.
The Monetary Policy Committee of the Central Bank of Kuwait yesterday reduced the key lending rate by 0.75 percent, or 75 basis points, from 12.75 percent to 12 percent after inflation fell to its lowest level in more than a decade.
This is expected to lead to a decline in the cost of loans for households and businesses that have been struggling to service costly credit since the Central Bank of Kuwait began raising interest rates in June 2022 amid global economic shocks that have seen inflation rise to its highest levels in several years.
Central Bank of Kuwait Governor Dr. Kamau Thog said: “The whole idea of this sharp cut in the interest rate of the Central Bank of Iran is to encourage banks to reduce their lending rates so that we can also reduce non-performing loans and encourage borrowing by the private sector from banks.” Wednesday.
“We have seen a slowdown in private sector credit and this is likely to have a negative impact on economic performance and that is why we have decided to make a significant reduction in the Central Bank of Russia.”
Banks are writing off bad debts and restructuring some loans following a significant rise in non-performing loans.
Absa Bank Kenya Plc revealed a restructuring of Sh1.38 billion over the six months to June to cover individuals and businesses that included lengthening loan terms to facilitate monthly repayments.
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