Dollar Loan Defaults Surge in Kenya Amidst Persistent Currency Shortage

Firms and individuals who have taken out loans in US dollars are now struggling to repay them, leading to a dysfunction in the foreign exchange market.

Borrowers in various industries such as real estate, transportation, communication, and construction, as well as individuals, are facing challenges in obtaining US dollars. Consequently, they are opting to repay their loans in the local currency. This has led to a technical default on their loans and has contributed to the rise in non-performing loans. The Central Bank of Kenya has observed a consistent growth in defaults, with the total amount reaching Sh615.54 billion by the end of September.

The current NPL ratio stands at 15 per cent, comparable to the 15.4 per cent observed in June 2007. In October, the NPL ratio deteriorated to 15.3 per cent, highlighting a persistent problem with loan defaults. Lenders have been required to set aside additional funds in preparation for a rise in defaults. The IMF reports that a substantial portion of these defaulted loans are in sectors like personal loans, real estate, transport and communication, and building and construction.

It is uncertain whether borrowers in these sectors have a natural hedge, as they are not major export sectors. The IMF also notes that banks are at risk from rising interest rates and exchange rate depreciation. Despite the Treasury's efforts to address the scarcity of dollars through an oil supply deal with Gulf companies, the challenge of accessing dollars persists.

The Treasury has informed the IMF that the oil import agreement did not ease the FX pressures and plans to end the deal because it caused distortions in the FX market. As stated in the report, Kenya's FX liabilities accounted for 34.9 per cent at the close of the third quarter in the previous year. This percentage was higher than the median of 31.6 percent for emerging and developing economies that have accessible data.