Moses Aron
2 October 2008
Financial institutions are preparing for a possible surge in loan defaults as high inflation, rising interest rates and the economic slowdown eat directly into consumers' budgets, a leading banker has warned.
Banks are also expected to start recording falling levels of savings as a consequence of inflation, putting the brakes on the funds available for further lending and investment.
Mr James Mwangi, the chief executive of Equity Bank, said the double digit inflation figures witnessed in the past six months had resulted in low levels of economic activity and could soon spell doom for the financial sector if not stopped.
"We are witnessing low levels of economic activity which if prolonged could cause a significant dent on the economy and the financial sector," he said as it became clear that a number of banks were working on measures to cushion their operations from the impending rise in loan defaults.Barclays Bank, for instance, has started a plan in which instead of waiting for customers to remit monthly loan repayment instalments, it is working with employers to deduct the amounts at the pay roll point.
"It is necessary to adopt such measures so as to cushion our operations from high default rates that might mean a ballooning of non-performing loans book which is bad for business," said Mr Adan Mohamed, the chief executive of Barclays Bank, in an earlier interview.
Equity Bank says that although it didn't have any specific plans, it is closely in touch with its customers to minimise exposure.
"Our customer base is composed of households as opposed to individuals which are easier to manage. This is a model that spreads risks to a number of individuals and as such mitigates them," said Mr Mwangi.
Mr Martin Odour-Otieno, the KCB chief executive, maintained that his bank is yet to see any negative trend in loan repayments but is closely monitoring the situation.
The level of loan defaults is expected to rise past the average in the coming months due to recent adjustments by a number of banks of the base lending rates.
The adjustments were effected early August began with Commercial Bank of Africa's upward change of the base lending rates by 1.5 per cent from 14 per cent to 15.5 per cent on August 1.
Other commercial banks, including Standard Chartered, I&M and NIC have since revised their rates, citing runaway inflation in the domestic economy.
The raise in base lending rates means that those with loans will now be paying slightly more than they bargained for at a time when inflation has left many with less disposable income levels because of the steep rise in recurrent expenditures such as food and transport.
It is, however, not the high loan default rates that is worrying economists. Most say the real danger lies in the possible general slowdown in growth as a result of less savings and the accompanying drop in the volume of investment.
Already, some banks say they are at a cross-roads on how to attract more funds from savers, at a time when they are being forced to spend more on living costs, and as the value of money starts to fall faster than the returns earned on savings accounts.
Ordinarily, an economy that is characterised by interest rates that are lower than the inflation rate results in a drop in savings rate as savers retreat from locking up funds that will be worth less, rather than more, in the future. Without increased savings, the banking sector's capacity to lend more will soon thin out marking a slowdown in growth for a sector that remains Kenya's most vibrant yet.
"If a bank cannot grow its deposits from its customers, prospects of growth are dim," said Mr Mohamed.
Yet that is what seems to be lying ahead if the current macro-economic situation persists in the next four months.
Market analysts say harsh economic conditions mean that banks will marshal less deposits as more individuals are left with less to save after spending a good portion of their income on food, transport and housing.
Inflation rose to 27.6 per cent in August mainly driven by a near tripling in the cost of electricity since June.
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