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May 10, 2012 5:00 pm
When Standard Chartered’s Kenyan retail lending book started growing by a billion shillings ($12.5m) a month last year, Richard Etemesi, chief executive, knew the region’s largest economy was overheating.
As financial institutions find ways to tap Africa’s growing middle class, Kenya is among the continent’s first low-income countries forced to tackle a rash of inflationary consumer credit that imperils desperately needed growth.
Encouraged by last year’s low interest rates, Kenyans started borrowing to buy everything from holidays to home furnishings. The increase helped create a credit bubble the country is now trying to deflate, risking bad debts. Government officials have downgraded growth forecasts for the $40bn economy to 5 per cent this year, from 6 per cent.
“All of a sudden people who weren’t used to getting loans suddenly bought new sofa sets, a car, took families on holiday, were going to spas,” says Mr Etemesi in his capacity as chairman of Kenya Bankers Association, blaming government for lowering interest rates. “We banks made it very easy because we parked people outside office buildings, in car parks and supermarkets and said: ‘In 48 hours we’ll give you a loan’.”
Credit to private households increased 32.5 per cent in 2011 to $2bn, accounting for the largest share of private sector credit.
While international officials identify high global food and fuel prices and falling European demand for tourism and flowers as the reason for record currency lows and high inflation, bankers blame errant domestic policy.
Low base rates encouraged inflationary consumer spending, which exacerbated the hefty trade deficit by boosting imports, worth more than twice as much as exports, and undermined the shilling. The central bank’s belated and sudden base rate increases, from 5.75 per cent in January 2011 to 18 per cent in December, have left many with loans they cannot afford to repay.
When Joseph Musili took out his first loan, he ploughed it into green beans, orange groves and coconuts – productive investments that helped him make 14 per cent repayment rates. But his latest loan is just to keep his family going – for school fees alone – at 28 per cent. “It is really biting; I am struggling to pay it,” said the 50-year-old.
While non-performing loans ran at 4.4 per cent of total loans in December, from 6.2 per cent the year before, KBA cautions the number of defaults may rise. Standard Chartered is still expanding its retail lending book at 700m shillings a month.
Government and banks have tried to let some air out of Kenya’s credit bubble, offering loan extensions and renegotiation to avert mass defaults. This has increased the maturity of about a tenth of loans, pre-emptive moves welcomed by Ragnar Gudmundsson, the International Monetary Fund’s representative in Kenya. Although private sector credit growth is still running at an annualised rate of 24 per cent in March, down from 30.9 per cent last year, bankers say this is for investment rather than consumption.
The government has called on banks to reduce lending rates to ease the burden on borrowers, but bankers fear this could reinflate lending. The government, which insists it can ride out the storm, has kept its rates at 18 per cent for the past five months.
“Everyone says there’s a bubble, it’s going to burst; but it doesn’t,” Robinson Githae, finance minister, told the Financial Times. He said a falling inflation rate – which the government forecasts will be 9 per cent in September, from a November high of 20 – will reduce the likelihood of defaults.
The most immediate hit may be felt in real estate, where high-end property prices grew fastest in the world in Nairobi and the Kenyan coast, at 25 and 20 per cent apiece last year, more than Miami or Moscow. Higher rates may see developers unable to fund projects sold off-plan and buyers unable to make good on deposits.
Shelter Afrique, which finances property developers and is owed $30m on 20 Kenyan projects worth about $70m, says the company has been forced to extend loan repayments in about 30 per cent of cases to avoid defaults.
“There will be cases where developers short-sell properties so at least they can complete,” says Farhana Hassanali at real estate company HassConsult. Financiers say there have been no new real estate projects in the past six months and some expect a three-year slowdown.
“Developers have been badly caught in the interest rate crossfire,” says investment adviser Aly-Khan Satchu. “There will be . . . collateral damage.”
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