Kenya's banking sector is evaluating the extent of losses incurred in recent political shocks in order to decide on suitable response measures.

Pressure has been building for the financial sector to come up with a stimulus package to help cushion borrowers from adverse effects of the crisis that has left many businesses in distress.

Disruption of business has in turn left banks in a loans servicing crisis because most borrowers are unable to meet their debt obligations.

While new terms of payments are easy to draw, there are chances that some borrowers, unlike the proverbial phoenix, may not rise from the ashes, with some having lost their means of livelihood, or, at worst, their lives.

That leaves banks facing additional risk exposures related to debts not being paid just when the industry appeared to have made irreversible steps towards ensuring asset quality (see table).

High default risks would invariably translate into higher interest rates. Lending rates have steadily fallen from over 25 per cent in 2003 to between 10 and 15 per cent currently for secured loans. Those unsecured at the retail level, are at between 13 and 19 per cent.

Managing that threat is expected to be made more difficult by recent developments in the credit sector that have seen a shift from collateral-based to cash flow-based lending both at the corporate and retail level. In cases where securities are charged, borrowers may find it difficult raising additional securities which some banks are understood to be demanding before reviewing the credit terms.

The outcome of the risk assessment is likely to reflect on what exposures the sector bank will have this year with a direct impact on both bank incomes and returns to shareholders.

The sector is just getting back to business as usual in the aftermath of post-election violence that erupted in some parts of the country, leading to disruptions of banking operations in major towns and cities, and some bank premises being burnt and looted.

Mr Richard Etemesi, the Standard Chartered Bank chief executive says the impact of the chaos on client's businesses would reflect on the exposure that banks have and what sort of intervention the industry will prescribe for affected clients.

"The immediate problem for the Kenyan banks is the ability for customers to pay," said Mr Etemesi, who is also the chairman of the Kenya Bankers Association.

"This is the first week we are seeing business as usual. Banking transaction levels have been very low even for January which is normally a quiet month largely due to customer disruptions in the pass few weeks," he said.

Equity bank, Kenya's largest bank by capitalisation and customer numbers, has however downplayed the impact of the shocks on its business, saying only Sh30 million of its 22 billion portfolio would be affected.

It is not clear whether the Sh30 million refers to the actual loan amount or the interest income from affected loans, which would mean the level of anticipated bad debt is substantially higher.

At a market interest of, say, 13 per cent, and assuming the amount mentioned by Equity chief executive Mr James Mwangi to be interest income, the amount of loans going bad would be about Sh230 million.

Unlike Equity, the Association of Micro Finance Institutions (Amfi) believes the crisis will be more pronounced; affecting between 15 per cent and 40 per cent of its collective Sh25 billion in lending. That would portend losses of between Sh3.8 billion and Sh10 billion.

Going by AMFI's estimate, the losses in the formal banking sector, with Sh646 billion in assets as at the end of October last year, would be between Sh97 billion and Sh258 billion.

"The losses are so high that we have to think of how we are going to save micro-enterprises that are affected. We need to come up with strategies to deal with the problems that have arisen from the political violence," said AMFI chief executive, Mr Benjamin Nkungi.

Key sectors that account for a bulk of bank lending such as tourism manufacturing, transport and plantation agriculture have reported huge losses to their businesses arising from the disruptions, portending debt payment problems.

The Small and Medium Enterprise sector, which has emerged as a growth segment for many banks over the last two years has not been spared either.

"Some of those who have lost include fishmongers in Kibera who cannot get fish because transport of goods has been disrupted from the Lake region," said Ms Lydia Koros, the chief executive of Faulu Kenya, which lends to the SME sector.

In the last five years, Kenyan banks have expanded credit quite significantly especially consumer loans on the back of a vibrant economy that has led to increased employment and business opportunities.

Although 38 per cent of Kenya's bankable population remains unbanked, the penetration of banking services in the last five years has accelerated making the banking sector the fastest component of GDP.

This penetration has enabled ordinary Kenyans to access banking services especially with greater ease, as banks have gone on an overdrive with loan products targeted to both retail and corporate banking segments.

"If there is loss of employment or businesses aren't able to generate the kind of money they have been generating because of the change in the business cycle, then that's the immediate concern for the banks," said Mr Etemesi.

Central Bank statistics indicate that at the third quarter of 2007 the growth in private sector credit had accelerated from 13.3 per cent in September 2006 to 17.5 per cent in September last year.

Overall, the credit to the private sector accounted for 72.9 per cent of the total domestic credit with the government accounting for 25.1 per cent.

"If the damage to businesses is extensive, then banks will have to make provisions...we might see write-downs and salvage plans depending on the extent of the exposure," said Mr Etemesi.

As a result of the post-election turmoil, a number of Key sectors of the economy are already staring at massive losses with the tourism, transport and manufacturing sectors topping the list.

The tourism sector which has been robust in the last few years has, according to government estimates, already laid off 20,000 workers as tourist arrivals have dwindled in the wake of travel advisories issued by their home countries.

On transport, motor dealers said most companies which had promised to take orders in the first quarter of the year had pulled back pending the resolution of the political impasse.

But for some vehicle assemblers such as General Motors (GM), their sales book has remained intact save for supply disruptions that has led to a cost spike.

Manufacturers on the other hand reckon that an upsurge in costs was related to sourcing for raw materials, offering extra security and increased transport costs, a move that looks set to squeeze the earnings of the sector further given the low sales volume.

This is set to translate to reduced or non payment of dividends to shareholders of industrial firms who have enjoyed a bounty season of dividends over the last four years.

If the current impasse persists, job cuts, delayed acquisition and expansion plans as well as lower profit levels by key sectors of the economy will all move to lower the profitability of the banking sector.

"We need to know whether this impasse will be resolved soon, because if it is not, then the banking sector is looking at the collapse of entire portfolios," said Mr Etemesi, adding that businesses in December had assumed that they would continue where they had left off after the general elections, a factor that had led many to underplay the political risk.

"You cannot divorce politics from business. Politics and business go hand in hand. In future business has to keep a keen year on politics," said Mr Etemesi.

Due to the political impasse, businesses have already lost revenue in January which is expected to lead to lower earnings for the first quarter of the year. With the destruction of infrastructure and loss of business confidence, a number of players may take time to recover.

In the capital city alone, the Nairobi Central Business District Association (NCBDA) estimates that six billion shillings worth of business opportunities had already been lost as a result of the current political stand-offs.

"The opportunity cost of the losses incurred so far has to be factored into the growth projections of any firm," said Mr Etemesi.