The latest survey by the Central Bank of Kenya (CBK) has revealed a surge in credit demand across key economic sectors, reflecting renewed confidence in the country’s financial landscape. The findings, drawn from 38 commercial banks and one mortgage finance company, indicate that while lending standards have remained largely unchanged, a shift in liquidity dynamics is influencing the Kenya banking sector outlook.
According to the CBK’s December 2024 Credit Officer Survey, demand for loans increased notably in the trade and personal household sectors. This is attributed to heightened consumer spending and business activity towards the year-end festive season.
Household credit demand grew by 4.7% year-over-year, reaching Ksh570.5 billion by November 2024. This surge defied the overall 1.1% contraction in private sector lending, reflecting a heightened reliance on credit. However, personal and household loans accounted for 14.3% (Ksh94.6 billion) of total NPLs by mid-2024, ranking fourth behind trade, manufacturing, and real estate.
Despite this, nine other economic sectors including manufacturing, real estate, and energy reported stable demand for credit. The mining and quarrying sector exhibited the least appetite for new loans, with 89% of respondents indicating no change in demand.
In a sign of cautious optimism, Kenya banking sector have kept credit approval standards unchanged across all sectors. Financial institutions have adopted stringent risk appraisal measures, ensuring that loan facilities are well-secured and backed by alternative repayment options.
However, non-performing loans (NPLs) remain a concern. The survey predicts that while NPL levels will stay constant in most sectors, an increase is expected in the personal and household sector. This trend has prompted banks to intensify loan recovery efforts, particularly in high-risk areas such as real estate and trade.
The December 2024 CBK Credit Officer Survey revealed that the gross NPL ratio slightly improved to 16.4% from 16.5% in the previous quarter. However, personal and household loans are expected to see an increase in defaults in the coming months, bucking the broader trend of NPL stabilization in sectors such as manufacturing, trade, and real estate.
The banking sector’s liquidity improved significantly during the fourth quarter of 2024, with 77% of surveyed institutions reporting stronger cash positions. Increased customer deposits, loan repayments, and the maturity of government securities contributed to this trend.
With additional liquidity, Kenya banking sector plan to expand credit issuance to the private sector (35%), invest in treasury bills (21%), engage in interbank lending (18%), and allocate funds to treasury bonds (16%).
Despite the sector’s overall stability, profitability declined during the final quarter of 2024. Quarterly pre-tax profits fell by Ksh.5.7 billion to Ksh.58.5 billion, driven by higher operating costs. Meanwhile, the capital adequacy ratio improved to 19.4%, reinforcing the resilience of Kenya’s banking system.
Return on equity (ROE) dipped from 24.9% in September to 22.0% in December, influenced by a combination of reduced earnings and increased shareholder funds.
The implementation of International Financial Reporting Standards (IFRS) 9 and 16 continues to shape credit risk strategies. Banks have strengthened risk appraisal frameworks to comply with IFRS 9, ensuring loan facilities are well-secured. IFRS 16, which mandates lease liabilities to be recorded on balance sheets, has also increased total assets and liabilities within the banking industry.
Kenya’s overall economic outlook remains mixed. While some industries are experiencing recovery, household financial distress remains a pressing concern. With banks preparing for a potential surge in loan defaults in Kenya, the coming months will test the resilience of both financial institutions and borrowers alike.
Looking ahead, credit officers anticipate continued demand for loans, particularly in consumer and trade financing. However, economic uncertainties including fluctuating interest rates and global market conditions may influence borrowing patterns in the coming months.
Kenya banking sector is navigating a complex financial landscape, balancing increased credit demand with disciplined risk management. While liquidity levels and credit issuance are on an upward trajectory, concerns over non-performing loans and declining profitability underscore the challenges ahead.
With a cautiously optimistic outlook, financial institutions remain focused on sustaining stability and supporting economic growth through strategic lending and investment decisions.
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