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Kenya Elections 2017: Funding

Data on funding for the 2017 Kenya Election by country and thematic area

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COVID-19: Why It Might Get Difficult to Access Bank Loans

Local banks are seeing a growing percentage of their borrowers falling behind or ceasing making payments on their loans. This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

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COVID-19: Why It Might Get Difficult to Access Bank Loans
Photo: Unsplash/Daniel Thiele
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Small businesses account for the vast majority of employment and job growth in the Kenyan economy. But these firms have been disproportionately impacted by the COVID-19 pandemic and are now facing a credit crunch.

Local banks are seeing a growing percentage of loans fall into the “non-performing” category – meaning that borrowers have fallen behind or ceased making payments.

This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

According to the KNBS Economic Survey, the informal sector provided approximately 83% of total employment in the country and created 91% of the new jobs last year.

The Capital Markets Authority (CMA) estimates that 86% of the total demand for the Small and Medium Enterprises’ (SMEs) funds is obtained from bank financing.

As such, most banks in Kenya have tailored loan products targeting these SMEs.

The demand highlighted above led to the launch of an unsecured loan, Stawi, by the Central Bank of Kenya (CBK) in collaboration with five other banks, targeting SMEs. However COVID-19 pandemic has posed challenges to these efforts.

The measures put in place to contain the spread of the pandemic such as restricted movement and curfews have impaired the operations of SMEs. This has, in turn, negatively impacted revenue streams for many. This poses a challenge to banks who have heavily  lent to these businesses. When the affected SMEs cannot repay their loans, it   impacts the bank’s loan portfolio whose quality is dictated by the creditworthiness of the borrowers.

This article focuses on examining the loan quality of local banks during this pandemic period by analyzing their non-performing loans. The loan portfolio quality is an extremely important component of a bank’s profile because loans are considered an asset out of which a bank produces the bulk of its profits.

A bank that is able to maintain satisfactory quality will make sufficient profits to generate capital for expansion. However, not all of a bank’s customers will pay back what they borrowed. Some will make repayments for a period of time and then default on the full payment of interest and principal.  In a nutshell, Non-Performing Loans (NPL) represent loans in which the interest or principal is more than 90 days overdue.

We analyse the banks’ loan portfolio quality between the first quarter of 2019 and the second quarter of 2020 for three publicly listed banks that are offering the Stawi loan product, namely: KCB, Co-operative Bank (Co-op) and Diamond Trust Bank (DTB).

Non-Performing Loans (NPL) Ratio

The loan portfolio quality of banks is measured by their NPL ratio -the amount of non-performing loans as a proportion of the total loans issued to customers;  popularly known as the banks’ loan book.

The ratio reveals the extent to which a bank has lent money to borrowers who are not paying it back.

COVID-19: Why It Might Get Difficult to Access Bank Loans
Both KCB and Co-operative Bank experienced an increased NPL ratio between the first and second quarters of 2020. This indicates a deteriorating loan portfolio quality within the period that SMEs’ revenue generation streams have been strained due to the measures put in place to contain the COVID 19 pandemic.

Indeed, KCB moved from an NPL ratio of 7 % to an NPL ratio of 10% during the pandemic; meaning they were losing 3 more shillings for every 100 shillings they issued as loans to defaulting borrowers.

COVID-19: Why It Might Get Difficult to Access Bank LoansA look at the rate of growth of the loan portfolio in the chart above reveals that the three banks experienced a sharp dip in the amount in loans they advanced to their respective customers. This shows that banks shied away from issuing more loans to their customers within the period the pandemic peaked.

“Borrowers rushed to seek moratoriums on their loan repayment. For banks, this is a loss of interest income, while it’s crucial so as to avoid these loans [from] falling into the NPL category which would reduce profits through provisions,” CPA Alex Muikamba, a financial expert affirms.

Interest Income versus Non-Performing Loans

Since margins on bank loans are usually low, the complete loss of a single non-performing loan can wipe out the profits generated from dozens of performing loans. We now compare the interest income from the loans with the amount of Non-Performing loans.

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans
It is observed that the total non-performing loans exceeded the interest income from loans and advances in most quarters for the three banks.

When loans are classified as non-performing, banks are compelled to stop accruing interest on those assets. This implies that their net interest income will fall as their funding costs remain unchanged.

Loan-Loss Provisions

Banks usually set aside an allowance for uncollected loans from customers to cover for any losses that may be occasioned by the Non-Performing loans.  This allowance is referred to as the loan-loss provisioning.

During the peak period of the pandemic in the second quarter of 2020, banks are seen to have increased their loan-loss provisioning in response to the declining loan portfolio so as to remedy the situation before it gets out of hand. The KCB increased their loan loss provisioning to a greater extent as compared to the other two banks that were analyzed. This is because of the higher increase in its non-performing loans as observed in the sharp rise of its NPL ratio.

COVID-19: Why It Might Get Difficult to Access Bank LoansThese increased provisioning costs will be charged against operating income and will fall through to the bottom line, reducing net income attributable to shareholders.

As uncertainty surrounds the time it will take for the economy to recover from the effects of the pandemic, so is the recovery of affected SMEs borrowers.

What happens to the Non-Performing Loans though?

Muikamba suggests that to mitigate NPLs, banks will have to restructure the loans to make it easier for borrowers to repay by extending the loan terms and hence reducing the instalment.

In a circular on the measures to mitigate the adverse impact of COVID-19 on loans and advances, the CBK recommended loan restructuring where a bank may negotiate with the borrower to work out revised terms to enable the borrower to make payment under more relaxed terms. This relief, however, was granted only to those borrowers whose loans were performing as at 2nd March 2020. For borrowers who were already struggling to make their repayments, they would have to contend with foreclosure which involves the recovery of any collateral used to secure the loan.

For unsecured loans, banks would be obliged to write-off the loans by removing them from their balance sheet.

In the extreme event where write-offs exceed existing loan-loss reserves and available profits from other sources, shareholders’ equity will have to be written down.

This would in turn affect capital levels which could necessitate new funding to ensure the banks meet the regulatory minimum capital requirements. The banks could also strengthen their capital levels by reducing loan growth so as to shrink its loan portfolio. In such a scenario, it would mean that you would have a difficult time accessing a bank loan.


Additional contribution by Purity Mukami. This article was first published by Africa Uncensored’s Piga Firimbi.

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COVID-19: Regulatory Measures Could Widen Kenya’s Financial Access Gap

If the new regulations by the Central Bank of Kenya put microfinance institutions under stress, low-income households’ will be unable to access credit, and their ability to maintain livelihoods will be affected.

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Covid-19: Regulatory Measures Could Widen Kenya’s Financial Access Gap
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Kenya’s financial inclusion has drastically improved in the last couple of years through development in the financial sector. Mobile money has been a key driver in narrowing the financial access gap in Kenya.

According to FSD Kenya, M-Pesa, Safaricom’s mobile money platform, is said to have lifted 2% of Kenyans out of poverty.

The impact is more significant in female-headed households, which had previously been limited in accessing financial services due to cultural restrictions. Financial access growth has reduced the gender gap from 13% to 6%.

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Mobile money has been the main financial service used by all socio-economic groups in Kenya. It has prompted the entrance of several private investors into Kenya’s credit market as the demand for quick, small loans has been growing rapidly. In the first quarter of 2020, loan accounts in Kenya increased by 21% compared to the last quarter of 2019. About 92% of these accounts were mobile loans. Another common source of finance for Kenyans, especially the lower-income groups has been chamas. These groups offer loans to members at about 1% per month.  Mobile loans and chamas have been falling through the cracks of formal lending systems, providing the lower-income groups with capital to pay school fees, do farming, expand their businesses and meet daily expenses.

Reasons for taking credit

Source: 2016 FinAccess Household Survey

Source: 2016 FinAccess Household Survey

Financial options for the poor are falling flat…

The financial services used by Kenya’s most vulnerable groups are mobile money, informal groups, banks, insurance (mostly NHIF) and digital loans.

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Luckily, the low-income groups can still comfortably use mobile money, especially since the Central bank extended the waiver of M-pesa fees for transactions equal to or below Kshs 1,000. However, they are unable to access mobile loans. In April, when the Central Bank of Kenya barred mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs) and stopped the blacklisting of borrowers owing less than Kshs 1,000, most mobile loan companies ceased loan disbursements and focused on getting repayments from the funds disbursed pre-COVID-19.

Usually, SACCO customers are mainly denied credit on account of failure to clear outstanding loans. Mobile money, mobile banking and digital loan apps providers deny customers credit on a bad or no credit history. Lower-income groups are the majority who make up Kenya’s informal sector or part-time workers in the formal sector who were the first to be culled from the workforce because of the economic impact of COVID-19. Many have been unable to repay their loans, and financial institutions are avoiding taking up more risks by lending to this consumer segment.

Reasons for being denied credit by the institution in 2019

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Low-income groups lack the financial cushion of adequate savings and have had to find new ways to survive

For those using informal groups to access finance, the main reason for being denied credit is usually low savings. In the first few weeks of the COVID-19 outbreak in Kenya, low-income groups depleted their savings, and now members of these informal groups are unable to raise their monthly contributions.

As financial services appear to have fallen flat, Kenya’s low-income groups have resorted to selling their assets, skipping meals, looking for a new start in their rural homes, amongst other measures they are taking to survive.

Microfinance institutions and mobile loan companies now face threats to their own existence. These institutions do not have a fall back market, as they rely solely on their shareholders or depositors. The commercial nature of these companies puts a heavy amount of pressure on borrowers who pay very high annualised interest rates of over 130%. If left unregulated, these players can end up increasing poverty. Some households have reported being much more afraid of their inability to repay their debt to these institutions than they are of the coronavirus.The Central Bank has stepped in to help borrowers by supervising digital lending for the first time. It has proposed a law that will see it regulate monthly interest charged by the mobile loan companies and borrowers’ non-performing loans.

Whereas the new regulations would protect borrowers, there’s another side to the coin. If the new regulations by the Central Bank of Kenya put microfinance institutions under stress, low-income households’ will be unable to access credit, and their ability to maintain livelihoods will be affected. There needs to be a delicate balance of measures put in place through a collaborative effort between international donors, financial institutions and the government. Stakeholders need to not only create adequate consumer protection legislation but also implement measures that will sustain microloan services to Kenya’s most vulnerable.

This article was first published by Africa Uncensored’s Piga Firimbi.

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Kenyan Budget Allocation in the Sector of Agriculture for the FY 2020/2021

For households which are going to be devastated by these economic realities, the government of Kenya needs to put in place adequate safety nets to assure food security and support food producers.

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JULIET ATELLAH - Kenyan Budget Allocation in the Sector of Agriculture for the FY 2020/2021
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One of the important responses and mitigation tools for proper planning and resource allocation during a time of crisis is a budget. Kenya has experienced infestation of desert locusts, floods as well as the rise in confirmed COVID19 cases. Following the government-imposed restrictions to reduce the spread of the coronavirus, the country is currently not only undergoing a health crisis but also economic crisis.

On 11th June 2020, the Cabinet Secretary for the National Treasury and Planning Ukur Yatani tabled a Ksh. 2.7 Trillion budget for the financial year 2020/2021 starting 1st July 2020. This comes against the backdrop of multiple the crises the country is undergoing.

One of the big four agenda of the government is to enhance food security for Kenyans. Under the sector of Agriculture and food security, the government has allocated Ksh. 8 billion to projects such as Kenya Climate Smart Agricultural Project, National Agricultural and Rural Inclusivity Project, Kenya Cereal Enhancement Programme, irrigation and land reclamation among others.

Additional allocation made by the government in the Agriculture and Food sector include: Ksh 3 billion to subsidize the supply of farm inputs to reach 200,000 small scale farmers through the e-voucher system; Ksh 3.4 billion for expanded community household irrigation to cushion farmers from the adverse effects of weather and further secure food supply chains; Ksh 1.5 billion to assist flower and horticultural farmers access international markets; Ksh 1.8 billion to enhance aquaculture business development projects; Ksh 1.4 billion to support small-scale irrigation and value addition; Ksh 1.3 billion to enhance resilience of pastoral communities; Ksh 1.1 billion to enhance drought resilience and sustainable livelihood; Ksh 1.6 billion to support processing and registration of title deeds; and Ksh 500 million to advance agricultural loans through the Agricultural Finance Corporation.

The budget allocation for the Agriculture and Food sector is an increase of 21 percent from Ksh 50.1 billion allocated in the 2019/2020 financial year to Ksh 60.7 billion allocated in 2020/2021.

As compared to the previous financial year 2019/2020, the government had allocated the funds to the following Agricultural sectors: Ksh 1.0 billion for crop diversification and to revitalize the Miraa industry; Ksh 0.8 billion for the rehabilitation of Fish Landing Sites; Ksh 0.7 billion for small-holder dairy commercialization. Ksh 7.9 billion for ongoing irrigation projects. Ksh 2.0 billion for the National Value Chain Support Programme ; Ksh 3.0 billion for setting up the Coffee Cherry Revolving Fund which was aimed at implementing prioritized reforms in the coffee sub-sector and Ksh 0.7 billion to pay outstanding debts to sugar farmers for cane deliveries to public mills. 2nd July 2020, Agriculture Cabinet Secretary Peter Munya announced sugar reforms and government directives on the importation of sugar and cane trading license. Other reforms include leasing of state-owned sugar mills to private investors for a period of 20 days to process and develop cane on farms such as Muhoroni, Chemelil, Sony, Nzoia and Miwani owned by the millers.

Programme based budget for FY 2020/2021, the State Department for Crop Development and Agricultural Research which is a merger of the former State Department for Crop Development and State Department for Agricultural Research, tabled a total expenditure for the FY 2020/2021 Ksh. 40.1 billion. The department is mandated to ensure sustainable development of agriculture for food and nutritional security and socioeconomic development. Improve the livelihoods of Kenyans by ensuring food and nutrition security through creation of an enabling environment, increased crop production, research and development, market access and sustainable natural resource management.

Kenyan Budget Allocation in the Sector of Agriculture for the FY 2020/2021

Kenyan Budget Allocation in the Sector of Agriculture for the FY 2020/2021

The report states that, “ Other key outputs to be delivered will include: subsidy of 582,500 metric tonnes (MT) of fertilizer; procurement and distribution of 750 tractors to farmers; identification, testing and up-scaling of 30 appropriate technologies by the Agricultural Technology Development Centres; increased maize productivity from 40 million bags to 67 million bags through expansion of acreage under maize production; increased ware potato productivity from 1.2 million MT to 1.6 million MT through increased certified seed production and distribution; increased rice productivity from 112,800 MT per acre to 271,000 MT through increased area under cultivation and subsidized mechanization, use of certified seeds and water saving technologies.”

With the comprehensive reforms under the department of Agriculture, the programme based budget further adds, ” The State Department will also ensure increased cotton production from 40,000 MT to 100,000 MT; increased tea production from 1.1 million MT to 1.6 million MT; annual sugarcane production from 4.8 million MT to 8.5 million MT and increased pyrethrum production from 300 MT to 3,000 MT by 2022.”

According to the KNBS economic survey 2020, the real Gross Domestic Product (GDP) is estimated to have expanded by 5.4 per cent in 2019 compared to a growth of 6.3 per cent in 2018. The growth was spread across all sectors of the economy but was more pronounced in service-oriented sectors. The Agriculture, Forestry and Fishing sector accounted for a sizable proportion of the slowdown, from 6.0 percent growth in 2018 to 3.6 per cent in 2019.

Last year, the country experienced a mixed weather phenomenon. This was characterized by drought during the first half of the year, followed by high rainfall in the second half of the year. This culminated in reduced production of selected crops and pasture for livestock.

According to Timothy Njagi Njeru and Milton Were Ayieko from Tegemeo Institute of Agricultural Policy and Development, Egerton University on COVID-19 on Kenya’s food security, a key challenge for the country is to raise productivity in the agriculture sector. This would not only ensure food availability, but potentially lift households out of poverty. For the government to attain this, it must reduce reliance on rainfed agriculture systems, use modern varieties and technologies by enhancing investments in extension systems, build resilience of farmers against the effects of climate change and variability, and improve agricultural market systems and infrastructure. The 2019 population census states that, total agricultural land operated by households stood at 10.3 million hectares, equivalent to 17.5 per cent of the total land area in the country. Of the total enumerated households, 6.4 million were practicing agriculture. Households growing crops were 5.6 million while those practicing irrigation were 369,679. In total, 5.1 million households were engaged in maize cultivation followed by 3.6 million cultivating beans. Livestock keeping was practiced by 4.7 million households while aquaculture and fishing activities were practiced by 29,325 and 109,640 households, respectively.

With the current Covid-19 pandemic situation, nationally, 30.5 per cent of households were unable to pay rent on the agreed date with the landlord. 52.9 per cent stated their main reason unable to pay rent is due to reduced income/earnings. For households, which are going to be devastated by these economic realities, the government of Kenya needs to put in place adequate safety nets to assure food security and support food producers.

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