logo
ADVERTISEMENT

Job losses loom as high loan costs choke businesses

CBK recently raised the base lending rate by 50 basis points to 13%

image
by The Star

Kenya15 February 2024 - 17:23
ADVERTISEMENT

In Summary


  • Loan defaults rose by Sh133.6 billion in the financial year ended December 2023.
  • The situation is so dire that lenders have been forced to freely revert to the Covid-19 debt relief measures. 
Central Bank of Kenya headquarters building along Haile Selassie avenue in Nairobi.

Employers and traders have been boxed into a corner by costly loans and mounting operational expenses and to keep afloat they have resorted to various cost-cutting measures among them job cuts.

Others have been forced to close branches and move into smaller spaces or less expensive locations.

A spot check by the Star through interviews and observations shows businesses are closing some units, going digital, and relocating to smaller spaces while others are folding up on rising operating costs. 

Janet Waigumo 34, has been running three boutiques at Imenti House in Nairobi's Central Business District since 2012.

Late last month, she relocated to Kahawa Wendani on the outskirts of the city, ostensibly to cut on rent. 

"The high tax regime has eroded business in this country. Operation costs are out of this world. The move to hike lending rates is the final blow. I usually borrow to bring stock. I can't try that now,'' Waigumo told the Star. 

"Even though I have a good credit profile, borrowing at above 18 percent is not sustainable. "

Yet, she is not alone. Several established companies including media houses are moving away from the CBD to less costly premises on the outskirts of the city or own buildings to cut on rent.

Others have opted for shared spaces with the majority forced to squeeze available spaces to accomodate more workers.   

"I'll remain with the Nairobi and Kisumu units. Running costs are too high for survival. I will have to close Polymas Mombasa and Eldoret. Unfortunately, this will push at least 150 people from the job market,'' Pandit said. 

He cites high taxes, soaring electricity and fuel prices, and high lending rates as the biggest triggers. 

The effects of high lending rates are clearly illustrated in the latest disclosure by the National Treasury, that shows loan defaults rose by Sh133.6 billion in the financial year ended December 2023.

This overtakes levels recorded during the Covid-19 pandemic era and sank the banking sector into a rare profit drop, as economic hardship ravaged households and businesses.

According to the Eurobond buyback prospectus for the $2 billion due June 24, the exchequer says manufacturing and trading sectors accounted for about Sh248.52 billion or 40 per cent of the Non-Performing Loans (NPLs), pointing to struggles among businesses and an elevated fear of layoffs and slowdowns in new jobs.

The Sh133.6 billion rise in the value of defaulted loans raced past the Sh99.2 billion that was added in the year ended December 2020, when households and businesses were battling Covid-19 economic disruptions.

This took the NPLs ratio—a measure of the proportion of loans for which interest has not been paid for at least three months— to 14.8 per cent at the end of December, compared with 13.3 per cent in a similar period in 2022.

The situation is so dire that lenders have been forced to freely revert to the Covid-19 debt relief measure, that include loan repayment moratoria to bail out struggling borrowers. 

Cooperative Bank Group and KCB have already listed measures they have taken to accommodate borrowers.

KCB Group chief executive Paul Russo said they are having conversations with customers to see how best they can accommodate them in light of their respective circumstances, especially as relates to existing facilities. 

Co-op Bank on the other hand says it is restructuring customer loans to align monthly repayment amounts with reduced income levels, while at the same time extending repayment periods.

“We are supporting our customers by way of restructures to align monthly repayment amount with their current (lower) income levels, an extension of repayment period to accommodate for reduced monthly payments,” the lender said in a statement. 

It also offers crucial non-financial services, notably customer training on debt management, to assist them in proactively building skills in prudent financial management to avoid debt distress.

I&M Group said it will sustain its waiver of the transaction fees on money transfers between mobile wallets and bank accounts throughout this year and open another window for the restructuring of customer loans.

This includes extending the moratorium on loan repayment to cushion customers on a case-by-case basis.

These glaring statistics have sent credit risk analysts back to the drawing board.

"We are witnessing some of the highest bad loans in recent past. While the move by the Central Bank's Monetary Policy Committee (MPC) to raise the base lending rate was to manage inflation, the downsize effects are glaring,'' credit risk analyst Joachim Malonza told the Star. 

He is calling for a balance between inflation and credit control to avoid a scenario where businesses will stagnate or close.  

In the last Monetary Policy Committee (MPC) meeting, CBK surprised the market with a 50-basis-point increase in the policy rate to 13 per cent, from 12.5 percent, the largest rate hike in 12 years, setting the stage for more expensive loans.

“The proposed action will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the five per cent mid-point of the target range, as well as addressing residual pressures on the exchange rate,” CBK governor and chairman of the MPC, Kamau Thugge, said. 

Although he partially supports CBK's measures to resolve the forex pressures to keep the weak shilling afloat and tame rising inflation, Jerome Odongo of GBX Capital is afraid that the government will soon crowd the private sector out of the local debt market.

"The apex bank has to do what it takes to ensure a sound monetary stance. However, it is quite tough for businesses whose average lending rate of 17.8 per cent is almost at par with coupons on state papers,'' Odongo said. 

He explains that lenders are flocking to risk-free state papers which are giving attractive rates in the range of 18 per cent and soon, "private entities will be shunned."

Last Wednesday, CBK revealed that an infrastructure bond seeking to raise Sh70 billion attracted bids worth Sh288.6 billion, with the S tate accepting Sh240.9 billion. 

The weighted average yield on the accepted bids for the 8.5-year securities was 18.46 percent. 

Despite this, CBK data shows lending to the private sector rose in the year ended December 31, 2023. 

Growth in commercial bank lending to the private sector stood at 13.9 per cent in December 2023, compared to 13.2 per cent in November.

Strong credit growth was observed in manufacturing (20.9 per cent), transport and communication (20.8 per cent), trade (13.1 per cent), and consumer durables (9.9 per cent).

"The number of loan applications and approvals remained resilient, reflecting sustained demand, particularly for working capital requirements,'' CBK said. 

This has eroded the business outlook, with the future output expectations subdued in January, ticking down to their lowest since May 2023, according to the latest Purchasing Managers Index (PMI) by the Standard Bank.

Notably, just 10 per cent of businesses predicted a rise in output over the next year, citing efforts to increase projects, add services, boost marketing and open branches.

ADVERTISEMENT

logo© The Star 2024. All rights reserved