•State Owned Enterprises are among the 10 largest borrowers and depositors in the banking industry and large payers of insurance premiums.
•Agencies in manufacturing, air transport, building and construction, transport and communication and trade have their loans mostly in watch and doubtful categories.
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A huge number of State Owned Enterprises (SOEs) are struggling to repay loans owed to banks exposing the banking industry to shocks, an industry report indicates.
The latest 'Financial Stability Report', by financial sector regulators , shows enterprises in 10 key sectors among them manufacturing, air transport, building and construction, transport and communication and trade have their loans mostly in watch and doubtful categories.
This, as more than half of the state agencies, 127 out of 247, sunk into losses in the 2019/20 financial year,mainly on poor fiscal discipline.
Loans extended to state enterprises by banks rose to Sh193.6 billion in the year to September this year, from Sh 100 billion as at December 2019, with the energy sector accounting for the largest share.
Parastatals account for 5.6 per cent of the Sh3.45 trillion domestic debt, Central Bank of Kenya (CBK) data shows, with these entities reported to have accumulated debt faster than private corporates.
They are among the 10 largest borrowers and depositors in the banking industry and large payers of insurance premiums, while Sacco Societies, largely draw their membership from SOEs.
According to the report, enterprises in the agriculture sector are among the few that have been able to service their loans, with those in transport, trade and manufacturing sectors being among the most watched.
“This exposes the banking industry to vulnerabilities in the SOEs,” the report released yesterday reads in part.
The survey shows long term debt to assets ratio for SOEs increased marginally, from 108.1 in 2018 to 108.5 in 2019 , while accumulation of long term debt relative to equity by private corporates declined.
The struggle in the entreprises has been pegged on among others, slowdown in economic activity, competition from cheaper imports and weak governance that have reduced their viability.
“The high level of long term liabilities against slow growth in assets suggest that the long term debt was not used to fund SOEs assets,” the report adds, an indicator more is going to to recurrent and non-core investments.
This limits productivity, expansion capacity and profitability of the enterprises, which further continue to struggle in paying suppliers, having closed the 2020 financial year with pending bills of about Sh93.3 billion– National Treasury data shows, Sh35.1 billion higher than the previous financial year.
The struggle in loan repayment raises both fiscal concerns and financial stability issues through their exposure to financial institutions by borrowing and the government by ownership.
Kenya Broadcasting Corporation, National Oil Corporation, East Africa Portland Cement , Kenya Railways Corporation and Postal Corporation of Kenya are among enterprises which have struggled financially in recent years.
Entities such as Kenya Electricity Generating Company, Kenya Electricity Transmission Company and Kenya Pipeline Company have remained strong.
The 'Financial Stability Report' is published once a year involving the CBK, Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and Sacco Societies Regulatory Authority (SASRA).
A total of 35 banks have extended loans to state owned agencies , thus comprising some of the large single borrower exposures.
Financial viability of SOEs affects financial institutions, households and private businesses through their interconnectedness and value chain, since their borrowing and spending decisions affects balance sheets in the economy.
The increase in current laibilities suggests that SOEs are not settling their short-term debt in time, thus raising indebtendess of service providers and suppliers, which has a contagion effect to the financial sector through non-performing loans.
To address weaknesses in SOEs balance sheets, the government published a policy framework on management of state corporations, Mwongozo.
Its implementation aims to enhance sound and prudent corporate governance and management of state corporations, thus ensuring their effectiveness in fuilfiling their mandates.
Implementation of Mwongozo has led to improved profitability of SOEs, with their Return on Assets and Return on Equity, rising from -1.4 per cent and 1.6 per cent in the 2014 to 3.9 per cent and 4.9 per cent in 2019, respectively..
However, SOEs providing services have been making losses since 2017, with their ROA and ROE declining from -4.1 per cent in 2017 to -6.1 per cent in 2018 and -18.4 per cent in 2019.
“This makes it difficult for them to meet their maturing obligations, including debt repayments without government financial support, hence posing a potential fiscal burden in ensuring such SOEs remain operational,” the report notes.