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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
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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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Dr Irene Irungu is a lecturer of Actuarial Science in the Department of Mathematics, Statistics and Actuarial Science at Karatina University, Kenya. She holds a BSc Actuarial Science and MSc Applied Statistics from the Jomo Kenyatta University of Agriculture and Technology (JKUAT) and a PhD Financial Mathematics from the Pan African University Institute for Basic Sciences Technology and Innovation (PAUISTI).

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Punitive Government Policies Jeopardise Kenya’s Food Security

The government is criminalising Kenyan farmers and leaving the country’s food security at the mercy of multinational corporations.

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Punitive Government Policies Jeopardise Kenya’s Food Security
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By 2021 your typical Kenyan smallholder farmer was producing 75 per cent of the foods consumed in the country. Yet the draconian laws imposed on the agriculture sector by the government have been facilitating their exploitation by private sector actors including multinational corporations. This is in total contradiction with President Uhuru Kenyatta’s move to include food security in his Big Four Agenda and begs the question of how the country can achieve food security when farmers are discouraged from producing food by these punitive laws.

Recently, there was an uproar on social media regarding the Livestock Bill 2021. The point of contention in the yet to be gazetted Bill is a clause that bars Kenyan farmers from keeping bees for commercial purposes unless they are registered under the Apiary Act. The government, through the Permanent Secretary for Livestock Mr Harry Kimutai, tried to justify this by saying that the aim of registering beekeepers is to commercialise beekeeping instead of it being a traditional practice.

Local pastoralist, agrarian and forest-dwelling communities have practiced beekeeping since time immemorial and it has been part of the subsistence economy of smallholder farmers who pass on this rich knowledge and expertise from generation to generation.

Bee-reaucracy

In its current form, the Livestock Bill 2021 will drive smallholder beekeepers out of honey production and pave the way for multinational corporations under the guise of regulating the sector. It is no different from the Agricultural Sector Transformation and Growth Strategy 2019-2029 that seeks to move farmers out of farming into “more productive jobs”, opening the door for their exploitation and impoverishment by agro-capitalists.

In a recent media interview, Mr Kimutai said that Kenyan honey is contaminated with pesticide residues. But if the government is indeed concerned about improving honey production, it should start by banning the use of toxic pesticides that are detrimental to bees and contaminate the quality of honey. Pesticides such as Deltamethrin have been found to be toxic to bees yet they are still used in Kenya.

Local pastoralist, agrarian and forest-dwelling communities have practiced beekeeping since time immemorial.

Section 93 subsection(1) of the Bill bars the importation, manufacturing, compounding, mixing or selling of any animal foodstuff other than a product that the authority may by order declare to be an approved animal product. This offence attracts a fine of KSh500,000 or imprisonment for a term not exceeding 12 months, or both.

Smallholder livestock farmers in Kenya have been growing “napier grass” to feed their cows and for sale to other farmers. Do these new regulations mean that they shall be committing an offence by growing their own feed and selling it within their localities?

Another punitive regulation is the Crops (Irish Potato) Regulations 2019, that requires transporters, traders and dealers to be registered with their counties, failure to which they face up to KSh5 million in fines, three years imprisonment, or both. This regulation also punishes an unregistered farmer with a one-year imprisonment or KSh500,000 or both, for growing a scheduled crop. It is no coincidence that capitalist-funded organisations like Alliance for a Green Revolution (AGRA) applaud the Irish Potato regulations as a new dawn for Kenyan farmers.

Bee-reaucracyThrough the Seed and Plant Varieties Act 2012, the government once again fails to protect farmers from capitalist exploitation. Part 1 of the Act defines selling as including barter, exchange and offering or exposing for a product for sale, taking away a farmer’s right to sell, share and exchange seed, a right that is recognised in the constitution.

Part 2 section 3 of the Act prohibits the sale of uncertified seed. The good old practice of selling and sharing seeds is further criminalised in section 7(5) which requires only seed appearing in the Variety Index or the National Variety List to be sold. This limits farmers from selling their varieties which they have been sharing, exchanging and selling for generations. Moreover, this automatically means that farmers selling their seed varieties are committing an offence if such varieties are not listed in the index.

Further, section 18 part 4 of this act allows for the discovery of a plant variety whether growing in the wild or occurring as a genetic variant, whether artificially induced or not. This section allows for the discovery of farmers’ indigenous seeds by multinational corporations keen to patent them for profit.

It is no coincidence that capitalist-funded organisations like Alliance for a Green Revolution (AGRA) applaud the Irish Potato regulations as a new dawn for Kenyan farmers.

The implication here is that since farmers’ seed varieties are not registered or owned by anyone, anybody can obtain the seeds of any crop variety, apply for their registration and claim their “discovery”. Farmers who have been conserving and reusing the “discovered” seeds will then lose the right to continue doing so and they will be required to pay royalties to the new “owners” of these seeds.

This act contravenes certain provisions of the constitution, in particular Article 11 (3) (b) of the Kenya Constitution 2010 which states that parliament shall enact legislation to recognise and protect the ownership of indigenous seeds and plant varieties, their genetic and diverse characteristics and their use by the communities of Kenya.

Foreign laws

The parliament has forfeited its obligation to enact laws that protect and enhance our intellectual property rights  over the indigenous knowledge of the biodiversity and the genetic resources of Kenyan communities  as mandated by Article 69 (1) (a) of the Kenyan constitution. It has allowed external actors to pirate local resources and trample indigenous rights.

Patenting indigenous seeds, barring farmers from keeping bees, and regulating the growing and selling of animal feed and potatoes is theft of the commons. The government is in cahoots with large corporations determined to kill the smallholder farmers’ sources of livelihood while singing about food security being part of the Big Four Agenda.

Foreign lawWhat sense does it make to frustrate smallholder farmers who grow 75 per cent of our food to serve the interests of imperialist multinational corporations keen on holding our farmers at ransom through abhorrent fines?

Patenting indigenous seeds, barring farmers from keeping bees, and regulating the growing and selling of animal feed and potatoes is theft of the commons.

It is time to reclaim and protect the commons that our communities have for a very long time thrived on. In her book Reclaiming the commons Dr Vandana Shiva points out that indigenous communities, including farmers, co-create and co-evolve biodiversity with nature, practises that have seen them overcome ecological challenges for generations. Our policies, plans and laws need to protect these practices for posterity.

Our parliamentarians should endeavour to defend our biodiversity, indigenous cultures and national systems – reclaiming the commons. We need policies that will allow farmers to produce food using indigenous seeds that are readily available and that they can be share amongst themselves. We need policies that will allow farmers to produce safer and more healthy food in an environmentally safe way, not punitive policies designed to eliminate farmers and have our food system controlled by corporations out to make profits at the expense of our health and our environment.

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Tech Disruption in the Agricultural Sector

The future of farming in Kenya counties, whether in knowledge sharing, collaborations, funding, or market access primarily lies in the farmer’s abilities to harness the respective strengths of the available and emerging Disruptive Agricultural Technologies. As the tech-platforms become cheaper, more available and affordable farmers yield and fortunes will likely inch upwards.

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Tech Disruption in the Agricultural Sector
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Disruptive technologies in agriculture (DATs) have been in Kenya since the early 1900s and can simply be defined as the digital and technical innovations that enable farmers and agri-firms to increase their productivity, efficiency, and competitive edge.

These platforms essentially help local farmers make more precise decisions about resource use through accurate, timely, and location-specific price, weather predictions. The agronomic data and information that they provide in Kenya is becoming increasingly important in the context of climate change. Besides, leveling the playing field, it can make small-scale or local marginalized farmers in Kenya to be more competitive.

Sophisticated off-line digital agri-tech can provide opportunities even in poorly-connected rural contexts, or with marginalized groups who have lower access to information and markets. In short, Disruptive Agricultural Technologies (DATs) are overturning the sector status quo.

Tech Disruption in the Agricultural Sector

Some of the key disruptive technologies in agriculture (DAT’s) include Waterwatch Cooperative in Kenya (Real-time alert system), Tulaa and Farmshine (Digital platform for finding buyers and linking buyers and sellers).

There is also Agri-wallet (platform for input credit/e-wallets/insurance products), dutch-based Agrocares operating in Kenya and Ujuzi Kilimo (portable soil testers, satellite images, remote sensing) as well as SunCulture (solar-powered irrigation pumps)

These platforms have helped to facilitate access to local markets in counties such as Makueni and West Pokot, improve nutritional outcomes, and enhance resilience to climate change. Disruptive agricultural technologies are designed to help stakeholders by reducing the costs of linking various actors of the agri-food system both within and across countries through faster provision, processing, and analyzing of large amounts of data.

The Disruptive Agricultural Technologies Landscape 

Over 75% of Disruptive Agricultural Technologies are digital. The remaining 25% of non-digital are either focused on energy (solar), or producers/suppliers of bio-products for agriculture.

Approximately 32% of the Disruptive Agricultural Technologies aim to enhance agricultural productivity, 26% are working to improve market linkages, 23% are engaged in data analytics, and another 15% are working on financial inclusion.

According to a 2019 World Bank report, Kenya has become a leading agri-tech hub with nearly 60 scalable Disruptive Agricultural Technologies (DATs) operational in the country, followed by South Africa and Nigeria. Kenya is said to have the third largest technology incubation and acceleration hub in the region. Examples of those technologies in Kenya include: Data-connected devices which use ICT to collect, store, and analyze data. This includes GPS, machine learning, and artificial intelligence. The Africa’s Regional Data Cube hosted in Nairobi,Kenya is a tool that helps various countries address issues related to agriculture, water, and sanitation. 

The use of robotics and automation in farming in Kenya has gained widespread acceptance. For instance, drones are used to monitor and improve the efficiency of agricultural operations and its usage is governed by the Civil Aviation Act.

Majority of farmers in Kenya are smallholder farmers and having access to Disruptive agricultural technologies helps even the competition with medium and large scale farmers as tools are created for both low and high connectivity areas.

Over 83 percent of Disruptive agricultural technologies are e-marketplaces that do not require high connectivity. Example is Twiga Foods whose digital platform connects retailers and food manufacturers, delivering a streamlined and efficient supply chain.

Kenya’s financial sector is characterized by a robust mobile money ecosystem (MPESA) with over 70 percent of the population using mobile money regularly which increases its potential for farming for smallholder farmers.

Despite that one of the biggest challenges facing the agriculture sector in Kenya is access to finance. This is largely due to the high risk of loaning to small holder farmers. FinTech apps use alternative data and machine learning to improve the credit scoring of smallholder farmers.

These apps help minimize the gap between the demand for credit and the supply of financing for smallholder farmers. Kenya is a hotspot for agricultural apps. There are numerous organizations working on developing digital solutions that combine precision farming with remote sensing data.

Connectivity and Adoption of DATSs

A significant number of the existing digital tools and technologies can be utilized in areas with low network to improve the productivity of the agriculture sector. Despite the increasing number of mobile phone users in Kenya, the penetration rate among smallholder farmers remains relatively low.

It may be difficult for many of these smallholder farmers to adopt Disruptive agricultural technologies (DATs) due to the high costs, complexity and capabilities required. Meanwhile for large scale farmers, the DATs highly boost their productivity, especially if they have already developed the capabilities in-house to accelerate adoption of these tech platforms. Therefore, from the onset, we need to understand who uses the technology and the implications of this.

Kenya has a well-established start-up ecosystem, made up of mostly young, adaptive and brilliant innovators who are leveraging low-cost digital platforms. This is coupled with funding from international donors and incubation activities address agricultural value-chain issues. There is a mix of actors for Disruptive agricultural technologies depending on the categorization of the technology.

This ranges from DATS that support creation, facilitate adoption and oversee diffusion of innovation.

These actors need strong and cohesive ties, both between, the regulatory bodies, farmers, county leaders, financiers, state agencies, and fellow developers. The nature of the collaborations could be cohesive and cooperative, where all the local actors have shared goals, to fragmented, where not all actors are on board, causing resistance and slowing down the process.

Despite a myriad challenges these radical and innovative (DATs) are revolutionizing and changing the farming landscape in the counties and working with the Ministry of Agriculture using technologies to deliver agricultural services more efficiently and accountable.

The future of farming in Kenya counties whether in knowledge sharing, collaborations, funding, or market access primarily lies in the farmer’s abilities to harness the respective strengths of the available and emerging Disruptive Agricultural Technologies. As the tech-platforms become cheaper, more available and affordable farmers yield and fortunes will likely inch upwards.

This article is part of The Elephant Food Edition Series done in collaboration with Route to Food Initiative (RTFI). Views expressed in the article are not necessarily those of the RTFI.

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Revealed: Majority of US Voters Support Patent Waiver on COVID-19 Vaccines

Shock poll reveals majority support for Joe Biden to suspend TRIPS and support global vaccination.

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A new poll finds that 60% of US voters want President Joe Biden to endorse the motion by more than 100 lower- and middle-income countries to temporarily waive patent protections on Covid-19 vaccines at the World Trade Organization. Only 28% disagreed.

The survey, carried out by Data for Progress and the Progressive International, shows a super majority of 72% registered Democrats want Biden to temporarily waive patent barriers to speed vaccine roll out and reduce costs for developing nations. Even registered Republicans support the action by margin of 50% in favor to 36% opposed.

The new polling shows that “there is a popular mandate from the US American people to put human life and economic recovery ahead of corporate profits and a broken intellectual property system,” said David Adler, the general coordinator of the Progressive International. Burcu Kilic, research director of the access to medicines program at Public Citizen and member of Progressive International’s Council, called on Biden to “listen to Americans who put him in power” and “do the right thing.”

Revealed: Majority of US Voters Support Patent Waiver on COVID-19 VaccinesDue to WTO intellectual property rules, countries are barred from producing the current leading approved vaccines, including US-produced Moderna, Pfizer and Johnson & Johnson. In October of 2020, South Africa and India presented the WTO with a proposal to temporarily waive these rules for the duration of the pandemic so that vaccines can be manufactured across different countries, increasing their availability, reducing their cost and ensuring that they are delivered to everyone on earth as quickly as possible.

In the absence of the waiver, the current manufacturing and distribution rates are unlikely to stem the pandemic’s momentum, especially as new variants, which are more infectious and seem to evade the acquired immunity from prior infection or from the current vaccines, continue to emerge. The US under President Trump joined other richer nations to block them.

The shock poll reveals a level of public support for intellectual property waivers that will likely add to growing congressional pressure on Biden to join those pushing to save lives through a global vaccination drive. Congresswoman Jan Schakowsky is working on a letter to the president to which Schakowsky says more than 60 lawmakers have added their signature, including House Speaker Nancy Pelosi.

Senator Bernie Sanders, Chair of the Senate Budget Committee, responded to the poll saying the US should be “leading the global effort to end the coronavirus pandemic.” According to Sanders, “a temporary WTO waiver, which would enable the transfer of vaccine technologies to poorer countries, is a good way to do that.”

Responding to the new poll, Representative Ilhan Omar called on Biden to “support a waiver to boost the production of vaccines, treatment and tests worldwide,” arguing that it was “not just an issue of basic morality, but of public health.”

Adler argues, “US Americans know rigged rules to prop up big pharma’s profits are not in their interest. The longer the virus has to spread, the more it can mutate and become vaccine-resistant. Covid-19 anywhere is a threat to public health and economic wellbeing everywhere. If intellectual property restrictions are not lifted, the pandemic will go on for longer, killing more people and damaging more livelihoods.”

The threat to the Global South from vaccine apartheid is a “death sentence for millions around the world—and it is because giant pharmaceutical corporations would rather maximize profit than provide vaccines to people who need it,” according to Omar.

Sanders agrees, saying “the bottom line is, the faster we help vaccinate the global population, the safer we will all be. That should be our number one priority, not maximizing the profits of pharmaceutical companies and their shareholders.”

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