Kenya's economic turbulence has led to a dramatic rise in non-performing loans (NPLs), which have surged to Sh651 billion in 2023.

This alarming increase from Sh503.2 billion in December 2022 reflects the challenges faced by borrowers, with NPLs now accounting for 3.6 per cent of total loans, up from 1.9 per cent a year earlier.

The Kenya Financial Sector Report 2023 highlights the implications of this trend.

“This indicates that borrowers are facing difficulties in repaying their loans, while banks are tightening lending standards to mitigate credit risks,” the report states.

As financial institutions respond to increasing risks, the number of vehicles and assets seized by auctioneers has risen significantly, revealing the harsh realities of the current economic climate.

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2023 has been marked by strife for households and businesses, leading to numerous closures and heightened hardship.

Many banks, facing loan defaults, have turned to auctioneers for recovery, resulting in a notable rise in auction advertisements across daily newspapers.

The banking sector has also felt the impact of rising NPLs, as evidenced by a reported 8.8 per cent decline in profits before tax.

The Central Bank of Kenya (CBK) documented a drop from Sh240.4 billion in 2022 to Sh219.3 billion in 2023, primarily driven by higher expenses outpacing income due to increased provisions for loan losses.

In discussing profitability, the report noted, “The profits before tax for the nine banks in the large peer group, which accounted for 84.7 per cent of overall profits before tax, declined in 2023, offsetting the increase in profit before tax for banks in the medium and small peer groups, resulting in a decline in the aggregate profit before tax.”

Large banks experienced a 10.89 per cent drop in profits, falling from Sh208.3 billion in 2022 to Sh185.6 billion in 2023, while medium and small banks reported gains of 2.58 per cent and 29.10 per cent, respectively.

Medium banks saw profits rise slightly from Sh29.2 billion to Sh29.9 billion, while small banks experienced substantial growth, increasing from Sh2.9 billion to Sh3.7 billion.

However, various challenges, including a difficult business climate and rising interest rates, have compounded asset quality issues, leading to an overall decline in profitability.

Despite these hurdles, the Kenyan banking sector has demonstrated notable resilience.

By December 2023, the sector’s core and total capital increased to Sh893.63 billion and Sh1,075.80 billion, respectively, up from Sh809.06 billion and Sh954.65 billion a year earlier.

Furthermore, total net assets grew by 16.7 per cent, rising from Sh6.5 trillion in December 2022 to Sh7.6 trillion in December 2023.

The report attributes this growth to a significant increase in net loans and advances, which comprised 49.4 per cent of the total net assets in 2023.

“The net loans and advances grew by 14.5 per cent in 2023 compared to 2022. The strong growth in loans and advances is very important for financial stability as it supports earnings, critical for capital build up,” it added.

Additionally, balances due from international institutions saw remarkable growth, climbing to Sh516.2 billion in 2023 from Sh164.1 billion in 2022.

This increase largely results from exchange rate depreciation and improved returns on deposits due to rising interest rates, illustrating the intricate relationship between domestic challenges and international economic dynamics.