The value of non-performing mortgages in Kenya hit a record high of 40 billion Kenyan shillings in December 2023 on the back of rising interest rates and tough economic conditions facing borrowers.
Newly released data from the Central Bank of Kenya (CBK) shows mortgage lenders' non-performing loans rose 8 per cent, or Sh3 billion, last year, capping a tough two years for the sector.
The rate of non-performing loans in this sector was in the low single digits a decade ago. Deteriorating mortgage balances have forced lenders to seize and auction partially paid-off homes in the past two years to recoup their investments. Meanwhile, some lenders are entering into private agreements with borrowers to sell properties, a softer alternative to direct auctions.
The defaults worth Sh40.8 billion represent 14.5% of the Sh281.5 billion outstanding mortgage loans at the end of 2023. The default rate for 2022 was 14.4%, amounting to Sh37.8 billion out of loans worth Sh261.8 billion.
The continued rise in interest rates since 2022 has hit variable-rate mortgage borrowers hard at a time when households were already facing a squeeze on their disposable income due to high inflation and a weakening exchange rate that has increased the prices of goods and services in the country.
The data showed that 88.4 percent of home loans, worth Sh249 billion, were floating rate in 2023, meaning monthly repayments rose every time banks adjusted interest rates to match increases in the central bank's base rate to combat rising inflation and a falling exchange rate.
The CBK has implemented seven interest rate hikes since January 2022, increasing the Central Bank Rate (CBR) from 7% to 13% during the period.
“The average home loan interest rate for 2023 was 14.3%, ranging from 8.7% to 18.6%. In 2022, the average was 12.3%, ranging from 8.2% to 17%. The increase in average interest rates was in line with the increase in interest rates during the year,” CBK said in its Banking Sector Annual Report for 2023 released yesterday.
The average mortgage amount for 2023 remains unchanged from 2022 at Sh9.4 million, while the Sh3 billion increase in non-performing loans equates to 320 mortgages defaulting.
The total number of home loans in Kenya increased from 27,786 in December 2022 to 30,015 by end-2023.
The number of loans is considered low in a country where demand for housing outstrips supply and a growing middle class is opting to rent or build their own homes without mortgage-related provisions.
Banks cite a range of barriers to accessing mortgages, including relatively low income levels of potential home buyers, the high cost of purchasing property, limited access to affordable long-term finance, and high ancillary costs such as stamp duty, legal fees and valuation fees.
The tough economic situation has contributed to the slow uptake of mortgages, even after relatively affordable long-term financing was introduced through initiatives such as the Kenya Mortgage Refinancing Company (KMRC).
Loan defaults have been rising across major sectors of the economy, led by trade, manufacturing, real estate and personal and households.The banking sector's gross non-performing loans to total outstanding loans ratio stood at 15.6% in December 2023, amounting to non-performing loans worth Sh651.8 billion.
At its most recent monetary policy committee meeting on June 5, the central bank said the non-performing loan ratio rose to 16.1% in April 2024, the highest level in 18 years.
According to CBK data from the banking supervision report, the commercial sector led in non-performing loans at Sh137 billion by end-December, equivalent to 21 percent of the total loans advanced by banks to the sector.
This was followed by the manufacturing sector with defaults worth Sh135.2 billion (20.7% NPL ratio), followed by the real estate sector with non-performing loans worth Sh111.5 billion, equivalent to 17.1% of the sector’s outstanding loans.
Meanwhile, non-performing loans to households and individuals stood at Sh92.03 billion, or 14.1% of the total loans contracted by the sector.
Collectively, these four sectors account for 73 percent of the banking sector's non-performing loans, which the CBK attributed to delayed payments from the public and private sectors, slow acquisition of housing units and a tough business environment.