Central Bank of Kenya Warns About Bad Loans in Banking System

NAIROBI, Kenya, Capital Markets in Africa — The amount of non-performing loans in Kenya’s financial system and the inadequate funds set aside to cover them are hampering the industry, Central Bank Governor Patrick Njoroge said, adding his office would conduct more stringent surveillance of the sector.

NPLs rose to 6.8 percent of total credit in February from 5.7 percent a year earlier, Njoroge, who’s been in the job for less than a year, told reporters in the capital, Nairobi.

“Clearly there is an issue here, the direction is not favorable,” he said of the souring debts. “Banks needed higher rates to cover losses from these bad loans. By increasing provisioning, it will create opportunities to price credit correctly and lead to a reduction in lending rates.”

The monetary policy committee says credit risk remains a concern, Njoroge said, adding that the industry regulator would tighten supervision and conduct on-site inspection of banks. Lenders in East Africa’s biggest economy should examine their credit policies and implementation to avoid reckless lending, he said.

Lenders had extended 2.26 trillion shillings ($22.3 billion) by November 2015, 16 percent more than a year earlier, according to the central bank’s supervision report from November 2015.

Gross NPLs rose to 139.9 billion shillings by November 2015 from 108 billion shillings a year earlier. While NPLs grew 30 percent to 139.9 billion shillings, lenders increased their total provisions by 20 percent to 58.1 billion shillings.

Chase Bank Kenya Ltd., a closely held lender, restated its financial results Tuesday to show total contingent liabilities of 26.6 billion shillings ($263 million) as of Dec. 31, 2015, compared with 13.2 billion shillings in 2014. On March 31, it reported liabilities of 13.2 billion shillings versus 25.8 billion shillings a year earlier. Loans to employees and directors in 2016 amounted to 13.6 billion shillings versus the 3.24 billion reported last week.

Kenya has seen 26 banks that have collapsed or been put under receivership including Imperial Bank Ltd., which was placed under statutory management in October. Njoroge declined to comment on Chase Bank.