Commercial banks and micro-financiers wrote off 95,179 loans valued Sh8.8 billion owed by small and medium businesses last year as the number of defaulting accounts jumped five times, amid a tough economy and high interest rates that choked the firms.
Fresh data by the Central Bank of Kenya (CBK) shows that commercial banks and micro-finance banks (MFBs) wrote off Sh7.7 billion and Sh1.1 billion in loans to micro small and medium enterprises (MSMEs), respectively in 2024.
“The total accounts written off constituted 10.8 percent of total MSME loan accounts and 1.1 percent by value. This was a significant increase in number and decrease in value from 2022, when 18,105 MSME loans valued at Sh 9.6 billion were written off,” the CBK said.
“The majority of these borrowers were unable to repay their loans due to high interest rates and a subdued business environment in 2024.”
Loans issued by banks accounted for 78.9 percent or an equivalent of Sh7.75 billion with the rest being on the books of MFBs.
Banks charged interest rates at upwards of 15 percent last year, with the rate averaging 17.22 percent as of November last year, significantly making it expensive for MSMEs already grappling with low sales.
Micro businesses accounted for the highest number of loans that were written off last year at 89,949 (94.5 percent of the loans) credit facilities valued Sh5.62 billion, with small enterprises second at 3.4 percent (3,319 loans) valued at Sh1.55 billion.
Struggles in getting credit from financiers and dipping sales forced firms to shut down, highlighting the economic meltdown that faced the MSME sector last year.
Lenders continued to demand that MSMEs in all categories provide collateral that is of sufficient value to fully or substantially cover the full value of the loan facility requested in a bid to ease the impact of the non-performing loans(NPLS).
The average cost of loan recovery measures rose, highlighting the growing burden of recovering the money from MSMEs last year compared to 2022. The cost rose to 16 percent for banks and 15 percent for micro-financiers last year from seven percent and 13 percent respectively, in 2022.
“This sharp increase indicates intensified efforts by financial institutions to manage expanding NPL portfolios, including greater investment in legal processes, asset tracing, and collection agencies. The rise also underscores the increasing difficulty and complexity of debt recovery in a challenging economic environment,” said CBK.
Some Sh149.8 billion loans to the MSME sector had been classified as NPLs as at December last year, representing 21.5 percent of the total NPLs (Sh697.3 billion) to the banking sector in the period.
CBK has since last year lowered the benchmark lending rates in a bid to trigger a reduction in lending rates from banks and micro-financiers and in turn enable more MSMEs to access loans for business expansion and day-to-day operations.
The banking regulator last month cut the benchmark lending rate to 9.75 percent from 10 percent, marking the sixth consecutive drop. Banks have in turn lowered their interest rates in a bid to avoid the regulator's wrath.
Banks that failed to lower interest rates on their loans risked daily fines from last month on CBK’s crackdown as the government sought to ease the private sector’s access to loans.
CBK started physical inspection on the banks from February this year, in a bid to identify those defying its directive to lower the cost of loans.
