Fusion Capital report ranks 2017 as one of the worst years for Kenya’s credit sector

Fusion Capital report ranks 2017 as one of the worst years for Kenya’s credit sector

2017 will be regarded as one of the worst years for both lenders and borrowers in Kenya, a new report from Fusion Capital, a private equity firm focused on real estate investment, has revealed.

“The interest rate capping which was effected in late 2016 had its impact reflected in 2017 financial institution financials,” said Michael Kimondo, Head of Treasury Operations at Fusion.

For the banks, the non-performing-loan ratio continued to move higher in May, reaching 9.9%, another multi-year record. Slower lending and higher bad debts inevitably translated into weaker aggregate profits, which fell by 31.1% to Ksh44.6 billion (US$433 million) on a pre-tax basis in the first five months of 2017 from a year earlier.

Even more starkly, banks made a rare net loss of Ksh700 million in May, compared with a Ksh14.1 billion profit in May 2016. As a results of all these, several banks including Barclays, Bank of Africa and Ecobank, among others, have closed or merged branches and shed jobs in the year 2017.

Others like Equity Bank have frozen new branches.

Further, 2017 was a general election year and together with other factors such as the drought saw the Kenya’s economy growth slow down to 5.0% in the second quarter of 2017 compared to 6.3% in the corresponding quarter of 2016. The loans defaults increased.

For the consumers, as a result of the interest rate cap and according to a research done by Kenya Bankers Association, credit to the private sector is nearly grinding to a halt, with the most affected being unsecured personal loans.

This, elaborates Kimondo, can be attributed to the constrained ability of banks to freely price risk under the law, which has resulted into a heightened scrutiny of loans. The loan disbursement has been on a declining trend, regardless of the fact that applications have been on an upward trajectory.

“In June 2017, for example, while about 3.2 million loan applications were made, only about 1.1 million of loans were disbursed. This representing a 34% success rate,” stated Kimondo.

He argues that come 1st January 2018, international accounting standard ‘IAS’ 39 will be replaced by International Financial Reporting Standards ‘IFRS9’. IFRS 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses.

The new standard requires entities to account for expected credit losses when financial instruments are first recognized and to timely recognize full lifetime expected losses. Currently, such loss on credit exposures is only accounted for when is incurred.

Kimondo says the standard brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them.

“In our view, if the interest rate cap is not repealed in 2018 and coming into effect of the IFRS9, the banks may further cut down on personal and unsecured loans,” he explained.

“Secondly, loans with collaterals cannot be foreclosed easily on default may also reduce. And finally, we expect to see some banks preferring short term lending to reduce on the risk and the required provisions,” Kimondo said.

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