Kenya’s bad debt recently soared to its highest levels in two decades. Indeed, this level of debt default was last seen in the East African powerhouse in 2005 when it reached around 30%. The current level of bad debt reached 15%, which is a rise to a nearly two-decade high, highlighting how difficult it is for borrowers to repay debts.
Indeed, Kenya's bad debt crisis has soared to its highest levels in almost two decades, with non-performing loans (NPLs) now accounting for 14.2% of the total loan book, according to the Central Bank of Kenya. This is up from 13.7% in June 2023 and 12.5% in December 2022.
Given that bank deposits increased by Sh430 billion in the first half of the year to surpass Sh5 trillion for the first time, banks are, thus, expected to write down Sh750 billion in their possession.
The surge in bad debt is attributed to a number of factors, including the COVID-19 pandemic, which had a devastating impact on the Kenyan economy. Other factors include rising inflation, interest rates, and unemployment.
The bad debt crisis is a major concern for the Kenyan government and the banking sector. It is putting a strain on banks' profitability and making it more difficult for them to lend to businesses and individuals. It is also slowing down the country's economic growth.
The government has taken a number of steps to address the bad debt crisis, including establishing a Credit Reference Bureau and a National Asset Recovery Agency. However, more needs to be done to tackle the root causes of the problem, such as high inflation and unemployment.
In the manufacturing, mining and quarrying, real estate, and building and construction, there have been rises in non-performing loans, according to the Central Bank’s highest body. Despite the industry’s pre-tax earnings increasing by 13.6% to Sh65.1 billion, leading banks including Equity, KCB, Co-Operative Bank of Kenya, Stanbic Bank, and I&M Bank have been forced to increase their loan loss provisioning due to the increased default rates. Kenya's bad debt crisis has the potential to have a number of negative consequences for the economy.
First, the bad debt could reduce lending by banks. Banks may be more reluctant to lend to businesses and individuals if they are concerned about the risk of bad loans. This could lead to a shortage of credit, which could stifle economic growth.
Second, the bad debt could lead to increased interest rates. Banks may charge higher interest rates to compensate for the risk of bad loans. This could make it more expensive for businesses and individuals to borrow money, which could also dampen economic activity.
Third, the bad debt could lead to higher borrowing costs for businesses and individuals. The increased interest rates could make it more difficult for businesses to finance their operations and for individuals to afford mortgages and other loans. This could lead to lower investment, consumption, and economic growth.
Fourth, the bad debt could engineer more business failures and job losses. Businesses that are struggling to repay their loans may be forced to close down, resulting in job losses. This could further weaken the economy and make it more difficult for people to find jobs.
Fifth, the bad debt could also engineer a decline in the value of the Kenyan Shilling. Indeed, the bad debt crisis could lead to a decline in the value of the Kenyan shilling. This would make imports more expensive and exports less competitive, which could further damage the economy.
Sixth, the bad debt would incentivize government borrowing to bail out banks or support the economy. The government may be forced to borrow more money to bail out banks or support the economy if the bad debt crisis becomes severe enough. This could increase the government's debt burden and make it more difficult to finance other public services.
In addition to these economic consequences, the bad debt crisis could also have a number of social and political consequences. For example, it could lead to increased poverty and inequality, as people lose their jobs and businesses fail. It could also lead to social unrest and political instability.