The value of non-performing mortgage loans in Kenya hit an all-time of Sh4o billion in December 2023 on the back of higher interest rates and difficult economic conditions borrowers are facing.
Newly released Central Bank of Kenya (CBK) data shows that there was an eight percent or Sh3 billion increase in the value of bad loans for mortgage lenders last year, which capped a tough two years for the segment.
The non-performing loans (NPL) ratio in the segment was in the low single digits a decade ago. The deterioration of the mortgage loan book has over the last two years forced lenders to repossess and auction partially paid-for houses to recover their funds, while others have entered into private treaties with borrowers to sell off property as a softer alternative to direct auctions.
The Sh40.8 billion worth of defaults was equivalent to 14.5 percent of the outstanding mortgage loan book of Sh281.5 billion at the end of 2023. In 2022, the default rate stood at 14.4 percent — Sh37.8 billion out of loans worth Sh261.8 billion.
The continual rise in interest rates since 2022 has hit those on variable rate mortgages hard, coming at a time when households were already facing a strain on disposable income due to high inflation and a weakening exchange rate that raised the cost of goods and services in the country.
The data shows that 88.4 percent of mortgage loans —equivalent to Sh249 billion — were at variable interest rates in 2023, meaning that their monthly repayment instalments went up every time banks adjusted their rates to match the CBK’s base rate hikes in its fight against high inflation and a weakening exchange rate.
Since January 2022, the CBK has made seven rate increments, raising the Central Bank Rate (CBR) from seven percent to 13 percent in the period.
“The average interest rate charged on mortgages in 2023, was 14.3 percent and it ranged from 8.7 percent to 18.6 percent compared to an average of 12.3 percent with a range of 8.2 percent to 17 percent in 2022. The increase in average rates was consistent with the increase in interest rates in the year,” said the CBK in its banking sector annual report for 2023, which was published yesterday.
In 2023, the average mortgage size stood at Sh9.4 million, unchanged from 2022, meaning that the Sh3 billion rise in bad loans was the equivalent of 320 home loans going into default.
The total number of mortgages in Kenya stood at 30,015 by the end of 2023, up from 27,786 in December 2022.
This number of loans is considered low in a country where the demand for housing exceeds supply, with the growing middle class instead opting to rent or build their own homes without mortgage-linked facilities.
Factors identified by banks as impediments to mortgage uptake include relatively low levels of income among potential home buyers, high cost of property purchase, limited access to affordable long-term finance and high incidental costs in terms of stamp duty, legal and valuation fees.
Tough economic conditions have also contributed to the slow uptake of mortgages, even after the introduction of relatively affordable long-term funds through initiatives such as the Kenya Mortgage Refinance Company (KMRC).
Loan defaults have been increasing across the main sectors of the economy, led by trade, manufacturing, real estate, and personal and household. In December 2023, the ratio of gross NPLs to total loan book in the banking sector stood at 15.6 percent, equivalent to Sh651.8 billion worth of bad loans.
In its most recent monetary policy committee meeting on June 5, the CBK said that the NPL ratio had climbed to 16.1 percent in April 2024, an 18-year high.
The CBK data in the banking supervision report shows that by the end of December, the trade sector led in the volume of bad loans at Sh137 billion, which translated to 21 percent of the total loans advanced to the sector by banks.
Manufacturing followed with Sh135.2 billion worth of defaults (20.7 percent NPL ratio), while real estate contributed Sh111.5 billion worth of non-performing loans, equal to 17.1 percent of the sector’s loan book.
Meanwhile, households and personal loans accounted for Sh92.03 billion worth of NPLs, equivalent to 14.1 percent of the total loans contracted by this sector.
Overall, the four sectors were responsible for 73 percent of the banking sector’s exposure to non-performing loans. The CBK attributed this to delayed payments from public and private sectors, slow uptake of housing units and a challenging business environment.
