East Africa: A region in debt as top banks record $125m in bad loans

East Africa’s top retail banks booked more than $125 million of bad loans in the nine months to September this year, as borrowers struggled to repay their loans following the expiry of a 12-month loan repayment relief programme for customers adversely impacted by the Covid-19 pandemic.

This comes as regional banking regulators in Kenya, Tanzania and Rwanda have raised concern over the rise of bad loans, which is now threatening the financial sector. Last week, Rwanda’s central bank reinstated regulatory requirements for commercial banks to increase provisions on loans that had been suspended due to the pandemic to allow banks to continue lending. The reinstatement could affect loans to the private sector.

Meanwhile, Bank of Tanzania (BoT) has introduced measures to address non-performing loans, which include zeroing in on individual bank employees who are directly responsible for issuing the loans.

The latest unaudited financial statements for regional lenders KCB, Equity and Co-operative banks show that the volume of gross non-performing loans (NPLs) rose eight percent to $1.81 billion, from $1.68 billion in the same period last year.

Co-operative bank was the highest with over $80.6 million worth of loans turning sour during the period under review, followed by Equity Bank at $39.46 million and KCB at $10.26 million.

Cumulatively, KCB had the highest portion of bad loans at $876.25 million, followed by Equity and Co-operative Banks at $501.6 million and $441.78 million respectively.

This is against the total loan book of $13.48 billion for the three lenders, with KCB at $5.81 billion, Equity Group at $4.99 billion and Co-operative bank at $2.73 billion.

Credit rating

In May, global rating agency Moody’s Investor Service affirmed the outlook on the three lenders’ long-term deposit and issuer ratings as negative, largely due to increased holdings of government securities translating to increased exposure on sovereign risks.

According to the agency, the negative outlook also captures the elevated risks to the banks’ asset quality that weighs heavily on their profitability.

“Problem loans already increased for all three banks, and we expect a further weakening stemming from the pandemic and following the gradual withdrawal of coronavirus related support measures, including a loan repayment moratorium that expired in March 2021, which led to around half of banking system loans having payment deferrals,” the agency said.

According to the Central Bank of Kenya (CBK), NPLs in the country’s banking industry increased by 0.09 percent in the three months to September 30, while Return on Equity (ROE) for the lenders declined to 21.97 percent from 22.67 percent in the same period.

Central Bank, in its quarterly credit survey of September 30, 2021, attributed the increased NPLs to a slowdown in business, company closures and job losses. Lenders became more cautious about issuing credit due to the high risk of default. The banks also tightened credit standards in the tourism, real estate and personal and household sectors on account of the pandemic.

According to the quarterly survey, gross loans for the entire banking industry increased by 2.7 percent in the three months to September 30, to $28.48 billion from $27.76 billion in June, mainly due to increased advances in the trade and real estate sectors.

Sectors that banks predicted increased NPLs were personal and household, real estate, and tourism and trade.

Recovery efforts

According to the survey, banks expect to intensify credit recovery efforts to reduce the volume of bad loans during the fourth quarter, from October to December. The sectors targeted for bad loans recovery include trade (87 percent), personal and household (86 percent), building and construction (81 percent), real estate (79 percent) and manufacturing (78 percent).

In March, CBK suspended measures to mitigate the adverse economic effects on bank borrowers from the coronavirus pandemic. Borrowers were given three months, up to June 3, to regularise their loan repayments. This followed the expiry of a one-year window in which the lenders had extended and restructured the repayments.

According to CBK, loans amounting to $15.17 billion were restructured during from March 3, 2020 to February 2021, accounting for 57 percent of the banking sector’s gross loans.

Following the resumption of repayments and some pay-offs, the outstanding restructured loans at the end of February 2021 were $5.08 billion, accounting for 19 percent of the total industry’s gross loans.

The CBK said over 95 percent of the outstanding restructured loans are being repaid in accordance with the new terms. During the loan repayment relief period, borrowers had restructuring options that included extension of the time to pay, a moratorium on interest, and waivers on interest or fees.

The measures allowed borrowers to mitigate job losses and pivot their business models to the new normal.

In Tanzania, NPLs have continued to threaten the stability of the banking sector. BoT governor Florens Luoga said in a November 7 notice that the bank would inspect commercial banks and financial institutions to pinpoint employees, and require the banks to take appropriate legal action against them.

“The Bank of Tanzania conducted a review to establish the main reasons behind high non-performing loans in the banking sector and established that, to a great extent, employees of some banks and financial institutions are directly responsible through issuing loans without following procedures, fraud/corruption or other practices that are tantamount to lack of integrity,” Luoga said.

The new measures also require banks to stop granting further credit accommodation to “unscrupulous borrowers who borrowed with the intention of not repaying the loans or using deceitful means”. Details of such borrowers will be kept in a special central bank register and shared with all commercial lenders.

A similar ploy will also be used on members of the civil service who are found to be serial loan defaulters,

According to their Q3 2021 financial statements published in October, Tanzania’s top two banks, CRDB and NMB, issued loans worth over $3.91 billion combined but each managed to keep their NPL ratios below the BoT’s five percent benchmark as smaller banks struggled, the aim being “to ensure that such civil servants do not access any additional credit accommodation until appropriate action has been taken and the non-performing loan is regularized.”

According to a central bank circular issued in January this year, commercial banks and financial institutions are required to maintain their NPLs at no more than 5 percent of total loans issued and cost-to-income ratios at a maximum of 55 percent by the end of next year (2022) or be barred from paying dividends and bonuses.

Lenders that fail to comply for another two consecutive years after 2022 will face further regulatory sanctions to be determined when the time comes, the circular said.

But conformity has proved next to impossible. By the end of the second quarter of 2021 two leading banks, TIB Development Bank and International Commercial Bank, had NPL ratios of 52 and 50.7 percent respectively, meaning that more than half the loans disbursed to their clients remained unpaid by June 30 this year.

Azania Bank, at 30.35 percent, and Equity Bank (30.26 percent) followed along with Access Bank (19.31 percent), Akiba Commercial Bank (19 percent) and the Dar es Salaam Stock Exchange-listed DCB (Dar es Salaam Commercial Bank) at 11.8 percent.

BoT data shows that the average ratio of NPLs among Tanzanian lenders dropped steadily from 11.9 percent in 2017 to 10.51 percent in 2018, 9.58 percent in 2019, and 9.3 percent in 2020, with the lowest ratio on recent record being 7.88 percent in 2015.

But like elsewhere around the world, the advent of Covid-19 in 2020 hit Tanzania’s economy hard and led to significant reductions in business revenues and cash flows across virtually all sectors. This resulted in small, medium and large-scale commercial bank borrowers finding it increasingly difficult to repay their loans on time.

As part of minor policy adjustments aimed at safeguarding financial sector stability during the pandemic period, the central bank in May 2020 instructed commercial banks and other lenders to open discussions with borrowers over these repayment difficulties and available options for loan restructuring or rescheduling. However, only a few banks complied with the directive.

In January BoT also told commercial lenders to submit by March 31comprehensive plans complete with timelines showing how they intended to attain the acceptable levels of NPLs and cost-to-income ratios by end of 2022. Response to this has also been lukewarm.

Along with its new focus on individual bank employees, the central bank also this month introduced new corporate governance regulations for the banking sector under which the tenures of chief executives and board members will no longer be allowed to exceed 10 years.

According to BoT the aim, among other things, is to “promote and maintain public confidence in banks and financial institutions; and provide guidance to directors for proper discharge of their responsibilities.”

East Africa’s top retail banks booked more than $125 million of bad loans in nine months to September this year as borrowers struggled to repay their loans following the expiry of a 12-month loan repayment relief programme for customers adversely impacted by the Covid-19 pandemic.

This even comes as regional banking regulators in Kenya, Tanzania and Rwanda raise concern over the rise bad loans post Covid-19, which is now threatening the financial sector. Last week, Rwanda’s central bank recently reinstated regulatory requirements for commercial banks to increase provisions on loans previously suspended during the pandemic to allow banks to continue lending, which is now likely to affect loans to the private sector.

Bank of Tanzania (BoT) on the other hand has introduced new measures to address the non-performing loans problem that include zeroing in on individual bank employees who are directly responsible for issuing such loans. Latest unaudited financial statements for Nairobi headquartered but regional lenders KCB, Equity and Co-operative bank show that the volume of Gross non-performing loans (NPLs) for the three lenders accelerated by eight (8) percent to $1.81 billion from $1.68 billion in the same period last year. Co-operative bank led the pack of bad loan issuers with over $80.6 million worth of loans turning sour during the period under review, followed by Equity Bank $39.46 million and KCB at $10.26 million.

Cumulatively, KCB had the highest portion of bad loans at $876.25 million, followed by Equity and Co-operative Banks at $501.6 million and $441.78 million respectively. This is against the total loan book of $13.48 billion for the three lenders led by KCB $5.81 billion Equity Group $4.99 billion and Co-operative bank $2.73 billion. Global rating agency Moody’s Investor Service in May this year (2021) affirmed the outlook on the three lenders’ long-term deposit and issuer ratings as negative largely due to increased holdings of government securities translating to increased exposure on sovereign risks. According to the agency the negative outlook also captures the elevated risks to the banks' asset quality which continues to weigh heavily on their profitability.

“Problem loans already increased for all three banks and we expect a further weakening stemming from the pandemic and following the gradual withdrawal of coronavirus related support measures, including a loan repayment moratorium that expired in March 2021 which led to around half of banking system loans having payment deferrals,” the agency said. According to Central bank NPLs in the entire Kenyan banking industry increased by 0.09 percent in the three months to September 30 this year, while Return on Equity (ROE) for the lenders declined to 21.97 percent from 22.67 percent in the same period.

Central Bank, through its Quarterly Credit survey (September 30, 2021) attributed the increased NPLs in the industry to slowdown in business, business closures and job losses, with lenders becoming more cautious to issue credit due to the high risk of default. Gross loans for the entire banking industry increased by 2.7 percent in three months to September 30 to $28.48 billion from $27.76 billion in June this year mainly due to increased advances in the Trade and Real Estate sectors, according to Central Bank’s Quarterly Credit Survey.

During the period lenders tightened credit standards in the tourism, real estate and personal and household sectors as a result of the Covid-19 pandemic. Banks predicted increased NPLs in the Personal and Household, Real Estate, Tourism and Trade sectors as a result of the adverse effects of Covid-19 pandemic during the period under review. According to the survey Banks expect to intensify credit recovery efforts to reduce the volume of bad loans during the fourth Quarter (October-December).

The sectors targeted for bad loans recovery include Trade (87 percent), Personal and Household (86 percent), Building and Construction (81 percent), Real Estate (79 percent) and Manufacturing (78 percent). Kenya’s Central Bank (CBK) suspended the emergency measures to mitigate the adverse economic effects on bank borrowers from the coronavirus pandemic on March 2 this year.

As a result borrowers were given three months up to June 3 to regularise their loan repayments following the expiry of a one-year window through which the lenders had extended and restructured the loan repayments for customers adversely impacted by Covid-19 pandemic.

According to CBK, loans amounting to $15.17 billion were restructured during the period from March 3, 2020 to February 2021, accounting for 57 percent of the banking sector’s gross loans. Following the resumption of repayments and some pay-offs, the outstanding restructured loans at the end of February 2021 amounted to $5.08 billion, accounting for 19 percent of the total industry’s gross loans. CBK said over 95 percent of the outstanding restructured loans are being repaid in accordance with the restructured terms.

During the loan repayment relief period borrowers were provided with various restructuring options including extension of repayment period, moratorium on principal or interest and waivers on interest or fees. The measures provided space to borrowers to ride through the pandemic, mitigate job losses and pivot their business models to the new normal. In Tanzania, non-performing loans have continued to threaten the stability of the banking sector with the central bank this month introducing new measures to address the problem that include zeroing in on individual bank employees who are directly responsible for issuing such loans.

Bank of Tanzania (BoT) governor Prof Florens Luoga said in a November 7 notice that the bank would embark on a close inspection of commercial banks and financial institutions aimed at pinpointing such employees and require the banks to take appropriate legal action against them. The employees will also be blacklisted and barred from being employed in any other Tanzanian bank or financial institution.

"The Bank of Tanzania conducted a review to establish the main reasons behind high non-performing loans in the banking sector and established that, to a great extent, employees of some banks and financial institutions are directly responsible through issuing loans without following procedures, fraud/corruption or other practices that are tantamount to lack of integrity," Prof Luoga said. "High rate of non-performing loans is among major causes of high lending rates and may lead to instability of the banking sector," he added.

The new measures also require banks to stop granting further credit accommodation to "unscrupulous borrowers who borrowed with the intension of not repaying the loans or using deceitful means." Details of such borrowers will be kept in a special central bank register and shared with all commercial lenders. A similar ploy will also be used on members of the civil service who are found to be serial loan defaulters, the aim being "to ensure that such civil servants do not access any additional credit accommodation until appropriate action has been taken and the non-performing loan is regularized."

According to a central bank circular issued in January this year, commercial banks and financial institutions are required to maintain their NPLs at no more than 5 percent of total loans issued and cost-to-income ratios at a maximum of 55 percent by the end of next year (2022) or be barred from paying dividends and bonuses.

Lenders that fail to comply for another two consecutive years after 2022 will face further regulatory sanctions to be determined when the time comes, the circular said. But conformity has proved next to impossible. By the end of the second quarter of 2021 two leading banks, TIB Development Bank and International Commercial Bank, had NPL ratios of 52 and 50.7 percent respectively, meaning that more than half the loans disbursed to their clients remained unpaid by June 30 this year. Azania Bank, at 30.35 percent, and Equity Bank (30.26 percent) followed along with Access Bank (19.31 percent), Akiba Commercial Bank (19 percent) and the Dar es Salaam Stock Exchange-listed DCB (Dar es Salaam Commercial Bank) at 11.8 percent.

According to their Q3 2021 financial statements published in October, Tanzania's top two banks by assets and capitalisation, CRDB and NMB, issuing loans worth over $3.91 billion combined but each managed to keep their NPL ratios below the BoT's 5 percent benchmark as smaller banks continued to struggle with bad loans. BoT data shows that the average ratio of NPLs among Tanzanian lenders dropped steadily from 11.9 percent in 2017 to 10.51 percent in 2018, 9.58 percent in 2019, and 9.3 percent in 2020, with the lowest ratio on recent record being 7.88 percent in 2015. But like elsewhere around the world, the advent of Covid-19 in 2020 hit Tanzania's economy hard and led to significant reductions in business revenues and cash flows across virtually all sectors. This resulted in small, medium and large-scale commercial bank borrowers finding it increasingly difficult to repay their loans on time. As part of minor policy adjustments aimed at safeguarding financial sector stability during the pandemic period, the central bank in May 2020 instructed commercial banks and other lenders to open discussions with borrowers over these repayment difficulties and available options for loan restructuring or rescheduling. However, only a few banks complied with the directive. In January BoT also told commercial lenders to submit by March 31comprehensive plans complete with timelines showing how they intended to attain the acceptable levels of NPLs and cost-to-income ratios by end of 2022.

Response to this has also been lukewarm. Along with its new focus on individual bank employees, the central bank also this month introduced new corporate governance regulations for the banking sector under which the tenures of chief executives and board members will no longer be allowed to exceed 10 years. According to BoT the aim, among other things, is to "promote and maintain public confidence in banks and financial institutions; and provide guidance to directors for proper discharge of their responsibilities."