Rising lending rates in Kenya have stifled loan repayment leading to an increase in bad loans, according to the Central Bank of Kenya (CBK).
The regulator in its quarter two report for the East African nation’s banking sector Tuesday showed that Non-Performing Loans (NPLs) increased 6 percent during the period in which it raised its benchmark lending rate from 8.5 percent to 10 percent, consequently pushing up interest charges.
The indicative rate currently stands at 11.5 percent, after CBK raised it by another 1.5 percentage points to shore up the shilling, which has weakened against major world currencies.
The apex bank has in the past months also increased the Kenya Bank Reference Rate (KBBR), a loan-pricing formula, from 8.54 percent to 9.87 percent.
Following the rise in the two benchmark rates, several banks in the East African nation have announced publicly that they have increased their lending charges, which currently average 17 percent but most banks charge as high as 22 percent.
The factors conspired to push up the value of bad loans by 60 million dollars between March and June.
“The value of gross NPLs increased by 5.7 percent from 1.15 billion U.S. dollars in March to 1.21 billion dollars in June. The quality of assets, measured as a proportion of net NPLs to gross loans slightly rose from 2.6 percent to 2.7 percent,” said the bank.
The sectors which experienced the highest increase in NPLs during the three months in review were trade, transport and communication and real estate.
However, in total, seven out of 11 economic sectors in the East African nation saw their bad loans rise.
Interestingly, the high lending rates and rising bad loans have not dissuaded Kenyans from borrowing from banks.
The report showed loans and advances during the period increased from 20 billion dollars to 21.3 billion dollars, translating to a growth of 6 percent.
The quarter also saw banks pre-tax profits rise to 388 million dollars, an increase of 6.2 percent from 367 million dollars in the period ending March.
“Similarly, a total income of 1.14 billion dollars was generated in the second quarter, being an increase of 6 percent from 1.09 billion dollars,” said the report.
Loan charges, various incomes and interest on government securities were the main sources of income accounting for 60.4 percent, 16.4 percent and 15.5 percent respectively.
The Kenyan banking sector, according to the Central Bank, will remain stable and maintain an upward growth trend the remainder of this year.
“The growth momentum will be underpinned by on-going efforts by the Central Bank and the National Treasury to ensure a stable macro-economic environment,” said the report. Enditem