High non-performing loans burden Kenyan banks' performance

Kenya's banking sector is facing a turbulent time as Fitch Ratings Ltd. retains its outlook on the country's banks at 'B' with a negative outlook. The primary concern cited by Fitch is the escalating levels of non-performing loans (NPLs) amidst adverse economic shocks. To shed light on the implications of this on the Kenyan economy and banking sector, Abraham Muthogo Kamau, CEO of Miradi Capital, joined CNBC Africa for an insightful discussion. According to Kamau, these sovereign ratings impact the level of investment inflows into the country and investor perception. However, he emphasized that these are estimates and outlooks that require regular revision. In contrast to Fitch's earlier projection of NPLs reaching 17%, current levels stand at 15%, highlighting the dynamic nature of these assessments. The rising NPLs have significant implications for the banking sector, with banks likely to reduce lending to the private sector and increase investments in government securities as a risk mitigation strategy. This reallocation of assets could potentially constrain credit availability for businesses and individuals. Furthermore, the heightened provisioning requirements due to increasing NPLs are expected to impact banks' profitability negatively. Kamau noted that banks may need to shift their focus from debt assets to government securities, which offer relatively higher returns. While banks may face challenges in passing on costs to customers due to bad debts, they are likely to limit lending to certain sectors. The weak banking system could deter investors from injecting more funds into the Kenyan economy, as banks redirect their focus from private sector lending to government securities. Kamau highlighted the distinction between equity and debt capital inflows, noting that equity investors are more directly impacted by a company's performance. Despite the negative outlook, Kamau emphasized that these assessments may not always accurately reflect the informal sector's dynamics in the economy. He attributed the rise in NPLs to global macroeconomic factors, such as interest rate hikes in various countries, leading to capital outflows from Kenya. In light of these challenges, regulators must deploy effective policy tools to address the banking sector's vulnerabilities and restore investor confidence. While the outlook remains cautious, Kamau urged a deeper analysis of the informal economy's impact, considering its significant contribution to the overall economic landscape. As Kenya navigates through these economic headwinds, proactive measures and strategic interventions will be crucial in strengthening the resilience of the banking sector and sustaining investor trust amid uncertainties.