Lenders urged to manage risks amid recovery

Credit risk, inflation and fraud are some of the risks Kenya's financial institutions are grappling with as they recover from the Covid-19 pandemic, a new report has shown.

According to the TransUnion Q2 2021 Kenya Market Analytics report, the lenders will need to adjust their credit facilities in line with the prevailing environment to ensure recovery.

“One challenge for the credit industry as a result of the pandemic is that financially stressed consumers were continuing to look for credit at a time that incomes were under pressure,” said TransUnion Africa Product Director, Samuel Tayengwa.

This, in turn, meant that the risk of non-payment increased, resulting in non-performing loans (NPL) rates remaining high posing a credit risk, he said.

According to the Central Bank of Kenya, the NPL rate eased to 13.9 compared to 14 per cent in June.

“Credit risk is the primary risk alongside fraud that risk lenders need to manage, especially at a time when credit defaults are expected to rise,” said Tayengwa.

Tayengwa recommended lending institutions to readjust their risk management thresholds for specific segments of their portfolio to contain NPL's.

Kenya’s overall inflation rate also remains a source of concern.

The rate stood at 6.57 per cent in August, driven by the high cost of food, non-alcoholic beverages, housing, water, electricity, gas and transport

“While higher prices resulting from inflation drive increased demand for credit, this can also boost the number of less creditworthy borrowers who may eventually default on their payments.,” the report notes.

The report also notes that as inflation rates rise, so does the base lending rate, which affects consumer ability to pay loans.

“Government and regulatory measures might help manage the situation, but ultimately, lenders need to be proactive in managing these risks,” Tayengwa said.

Fraud is an ongoing and increasing concern, especially with the growth in digitised banking solutions, the report notes.

Annual losses from identity theft and loan stacking amount to approximately Sh13.3 billion,  highlighting the fact that Kenyan lenders need sophisticated solutions for identity verification and fraud prevention, TransUnion said.

According to the report, the risks led to a decline in the number of active accounts and new accounts opened in Q2 compared to the previous quarter.

It shows a 12.3 per cent drop in the number of active accounts recorded in Q2 2021, to 18.4 million, down from 21.0 million in Q1 2021.

The total number of active clients dropped by 2.1 per cent down to 9.8 million in Q2, from 10.0 million in Q1.

Despite the decline in active accounts and clients, credit demand remained high from financially stressed consumers with the value of loans increasing, the report notes.

Ongoing consumer demand for credit saw the value of new loans disbursed during Q2 increase by 2.5 per cent from Q1, from Sh486.6billion to Sh499 billion.