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Sharp rise in loan defaults by Kenyan MSMEs is credit-risk negative for banks

  • 15.5% of the total value of MSME loans was classified as non-performing as of December 2020
  • The deterioration in the MSME loan portfolio mirrors the decline experienced in overall asset quality last year.
  • Kenya's banking sector's NPL ratio worsened from 2019 to 2020 and is expected to increase further in 2021

Analyst: Ronel Oberholzer, IHS Markit

The Central Bank of Kenya's (CBK) 2020 Bank Supervision Annual Report contains the biannual FinAccess Business Supply-Side Survey conducted in February 2021. This survey highlighted that, as expected, micro, small, and medium-sized enterprises (MSMEs) struggled to service their loans in 2020, leading to a significant rise in defaults when compared with 2017 (the last time the survey was conducted). The survey shows that 15.5% of the total value of MSME loans was classified as non-performing as of December 2020, compared with 13.6% in 2017. The survey attributes this rise to the coronavirus disease 2019 (COVID-19)-virus pandemic affecting borrowers' debt service capacity. It shows that MSME loans constitute around one-fifth of the overall banking sector's loans. The value of the MSME portfolio was KES638 billion (USD5.84 billion), 21% of the total banking sector loan portfolio in 2020, up from KES414 billion or 19.2% of the entire loan book in 2017. MSME loans grew at an annual average rate of 15% between 2017 and 2020, higher than the 11% average yearly growth for the overall banking sector's loan portfolio.

Significance

  • Kenya has a sizeable MSME sector making up close to one-third of GDP. Commercial banks, which are the source for 95% of MSME loans according to the CBK, have been competing for a larger share of the MSME market.

  • The survey shows that MSME loans constitute around one-fifth of the overall banking sector's loans. The value of the MSME portfolio was KES638 billion (USD5.84 billion), 21% of the total banking sector loan portfolio in 2020, up from KES414 billion or 19.2% of the entire loan book in 2017.

  • MSME loans grew at an annual average rate of 15% between 2017 and 2020, higher than the 11% average yearly growth for the overall banking sector's loan portfolio, not only highlighting the exposure of banks to this market but also pointing to the drive from banks to compete for a larger share of the MSME market.

  • According to the survey in 2019 and 2020, respectively, the banking sector restructured a total of 0.8% and 7.9% of the total value of the MSME loan book. The enhanced restructuring of loans to personal, MSMEs, and corporate loans formed a significant part of emergency measures announced by the CBK to assist borrowers adversely affected by the COVID-19-virus pandemic.

  • As of the end of December 2020, banks had restructured loans worth KES1.6 trillion or 54% of total banking sector loans, according to the CBK. The emergency measures were applied from March 2020 to 30 June of that year and were extended to 31 December 2020.

  • The deterioration in the MSME loan portfolio mirrors the decline experienced in overall asset quality last year. Kenya's banking sector's non-performing-loan (NPL) ratio worsened from 12% in 2019 to 14.4% in 2020 and is expected to increase further in 2021 as economic growth prospects are challenged by uncertainty and the slow rollout of the COVID-19-virus vaccine programme. Banks are likely to adopt more stringent credit standards in the challenging economic environment as borrowers' debt service capacity remains under pressure. These developments are credit-risk negative with the accompanying deterioration of asset quality 


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