Kenyan banks faced a 4.9% decline in pre-tax profit during the nine months ending in September. This was due to a surge in loan defaults, reaching levels not seen in 16 years. The Central Bank of Kenya reported that the sector’s pre-tax profit fell from Sh187 billion to Sh177.8 billion compared to the previous year.

This decline is unusual for the banking industry, which has generally experienced profit growth. Even in the same period the previous year, gross earnings increased by 28.5%. The top two profitable lenders, Equity Group and KCB Group, also saw a dip in profits from their Kenyan operations during this period.

The decline in profit is linked to economic challenges faced by borrowers in Kenya. The country experienced a rare decrease in profit in 2017 due to the impact of interest rate capping laws and in 2020 due to the disruptions caused by the Covid-19 pandemic.

Data from the Central Bank of Kenya reveals that gross non-performing loans (NPLs), loans on which interest and principal have not been paid for at least three months, reached Sh615.54 billion in September. This marks three consecutive months of increasing defaults. The NPL ratio is now at 15%, close to the 15.4% recorded 16 years ago in June 2007.

The stock of NPLs has risen by Sh127.84 billion since January, causing concern among banks. As a result, banks have increased provisions for potential loan defaults, impacting their profitability.

Top banks’ nine-month unaudited results indicate a rising trend in the amount of money set aside in anticipation of defaults, affecting overall profitability. Factors contributing to this include the high prices of goods and services, new statutory deductions, and increased interest rates, with the Central Bank Rate at its highest point in nearly seven years, currently at 10.5%.

The Central Bank of Kenya’s credit survey at the end of September revealed that 45% of surveyed banks expected NPLs to rise in the fourth quarter, while 34% anticipated a fall and 21% expected them to remain constant. Bankers informed the Central Bank that they expect NPL levels to remain constant in nine economic sectors but rise in personal, household, and trade sectors.

The Central Bank Monetary Policy Committee is scheduled to meet on December 5 to review the regulator’s benchmark rate. The last review in October maintained the rate at 10.5%, citing the ongoing impact of the June tightening of monetary policy to anchor inflationary expectations in the economy.

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