Bad loans decline in Kenya

April 28, 2010
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, NAIROBI, Kenya, Apr 27- Non performing loans in the local banking industry have been improving despite the many challenges such as the global recession and the effects of the 2008 post election violence that the country has been grappling with, a new study has shown.

A banking survey by a financial strategic business research company Think Business shows that although the economy has been sluggish in the last few years, there has been a reduction in bad loans as many banks in the country have been lending prudently and taking good risk management practices.

"Banks are actually giving out more loans and advances. Their growth has actually been going up over the last five years mainly because Kenyans have become a lot more prudent in terms of paying back whatever they borrow," said Think Business Chief Executive Officer Ochieng Oloo.

According to the firm\’s report, the ratio of  total non performing loans to total loans (advanced by a bank) in 2008 stood at 7.17 percent compared to 7.76 percent in 2007.

Bad loans in the 1990s crippled the sector and saw many banks collapse as many borrowers defaulted on their loans which led to a reluctance to lend.This situation however saw the Central Bank of Kenya tighten regulatory controls which have in turn resulted in a more stable and secure banking industry.

At a press conference, Mr Oloo also said that the sector had defied the harsh economic environment and continued to post improved growth recording a total asset base of Sh1.2 trillion in 2008 compared to Sh548 billion in 1999. Overall profitability increased by 18 percent compared to that of 2007 while the deposits went up by 23 percent over the same period.

Cut throat competition has been seen in the industry has evidenced by the expansion of the branch networks across the country as banks rush to claim a piece of the financially excluded market.

At the briefing to announce the nominees of this year’s Banking Awards, the CEO however said banks were likely to be slightly impacted by the slowdown in economic growth.  From their improved performance in the first quarter of this year however, all indications are that the sector might be able to weather the storm.

Although the sector had posted constant growth over the last 10 years, many banks he pointed out, had not increased their capital base in line with their profit growth. This is despite a directive requiring them to increase their raise their minimum capital to Sh1 billion by the end of this year.

The requirement contained in the 2007/2008 national budget was meant to reduce the number of banks in the coutnry and thus improve service delivery. Smaller banks have however been reluctant to consolidate as it was predicted when the directive was passed.

Industry expert Prof Wilfred Nyangena reckoned that these institutions have either chosen to remain small or cannot raise the required amount. Unconfirmed reports indicate that about 17 banks have not reached the threshold with about seven months to go to the end of the year.

Prof Nyangena however expressed optimism that by the end of those months, most if not all of these banks will have been able to raise the set minimum capital requirement.

He pointed out such banks have several options such as issuing Initial Public Offers, merging or seeking strategic investors that can enable them to raise the additional funds.

Meanwhile, National Bank of Kenya which until recently was on a loss making streak has been nominated as one of the best banks in Kenya.

According to rankings contained in the forthcoming issue of the Banking Survey, the bank was categorised among four other big financial institutions including Barclays, Standard Chartered, I&M and Equity banks.

The winner will be announced at a gala event this Friday.

The awards in their fifth year aim to encourage stability and prudence in the banking industry have partly contributed to the stiff competition in the sector.

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