An Analysis of Non-Performing Loans in Kenya

Abstract

Kenya has historically recorded elevated levels of non-performing loans (NPLs) in the banking sector. The average NPLs ratio per year exceeded nine percent since 2010. The ratio has been particularly elevated in the last five years, averaging 13.23 percent per annum. Except for Ghana, Kenya’s NPLs as a percent of gross loans has been way above those of its peers in the last three years. The NPLs problem in the country cuts across all sectors of the economy and commercial banks irrespective of size or ownership. The concentration of NPLs was persistently high in Trade, Real Estate, Manufacturing, and Personal and Household sectors during the whole period under review, 2010-2021. The sectors with concentration of NPLs were the same sectors with concentration of sectoral distribution of loans by value and number of loan accounts. This calls for close monitoring of these four sectors by the regulatory authority to ensure that banks make adequate provisions for the loans in these sectors and abide by supervisory and regulatory requirements to mitigate risk of default. Delayed payments from private and public sectors was found to be one of the main contributors to the high NPL percentages. In 2012, the high interest rate regime impacted the quality of loans and advances negatively, thus contributing to high default rates. The high NPLs levels in the Real Estate and Trade sectors have been attributed to slow uptake of housing units and challenges in the business environment, respectively. Apart from the Central Bank’s Prudential Guidelines, there are no common strategies that commercial banks are required to apply to help manage stocks and flows of NPLs. While different commercial banks manage the NPLs problem internally, the commercial banks in the country do not have dedicated in-house NPLs units. To reduce the NPLs problem in the country, commercial banks should employ new innovative ways of managing NPLs stock and flows like setting up separate dedicated in-house NPLs units; the Central Bank should pay particular attention to the provisions that are often violated (in particular, capital adequacy requirement, single obligor limit and prohibited business) and come up with specific actions to effectively enforce compliance; and the public sector should make a concerted effort to reduce pending payments to the business community.

Keywords: Non-performing loans, gross loans, supervisory and regulatory compliance, credit risk

DOI: 10.7176/JESD/14-8-01

Publication date: April 30^th 2023