CBK boss Patrick Njoroge defends banks on increasing provision for bad loans

  Central Bank of Kenya Governor Dr. Patrick Njoroge says inflation has increased largely driven by food prices taken on 21st January 2016. PHOTO:WILBERFORCE OKWIRI

Central Bank of Kenya (CBK) Governor Patrick Njoroge has defended banks against their latest decision to cushion themselves from a deluge of rising bad debts, saying it will help protect depositors.

Responding to a question on why tax authorities view increased loan loss provisions among banks as a way to deny them taxes, Dr Njoroge yesterday said lenders are only doing so to reflect the true position in the market.

“That’s a conversation I will want people to think through clearly. It is not that when you are providing for bad debts you are hiding. It is quite clear in the accounts. Let us not call things what they are not,” the CBK boss told The Standard.

In books of accounts, loan loss provision is treated as an operating expense, meaning that an increased provision reduces the profit declared by a bank and eventually leads to reduced corporate tax.

It is set aside as an allowance for uncollected loans and loan payments. The provision is used to cover several factors associated with potential loan losses, including bad loans, customer defaults, and renegotiated terms of a loan that incur lower-than-estimated payments.

Not hiding anything


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CBK data up to February showed gross non-performing loans (NPLs) as a ratio of gross loans at 9.7 per cent from 9.1 per cent earlier in the year. This, Dr Njoroge said, mirrors the challenges in manufacturing, trade, and real estate sectors.

He added that banks are now exercising tighter credit standards as part of the “new normal” in the banking sector, which is a departure from initial days when provisioning was “a bit sloppy or not done correctly.”

“They (banks) have tighter standards now and this is good. It means that the numbers are accurate and they are not hiding anything. We are more comforted that banks are doing a better job in classifying their loans,” said Njoroge.

The CBK boss, who has been hailed for increasing transparency in the banking sector, told The Standard that authorities should not view banks as regular hardware stores, but as institutions that must protect depositors and shareholders in equal measure.

Data from CBK shows that the trade, manufacturing, and real estate sectors account for about 60 per cent of credit from banks.

Njoroge said the manufacturing sector has suffered from unmatched competition with other countries, leading to higher NPLs. For trade, he said, delayed payments from retail outlets have forced banks to increase provisioning.

“The main outlets where most of us shop – Uchumi, Nakumatt, and Naivas – have been struggling and most of them have turned away from regular bank channels and ended up borrowing from their suppliers,” he said.


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The Government’s slow pace of automating the Land Registry, yet title deeds have to be transferred before payments are made, has also contributed to high NPLs.

Company filings from the top three profitable banks in Kenya show increased loan loss provisions. KCB Bank increased it by 474 per cent to Sh3.76 billion while Equity Bank increased it by 294 per cent to Sh5.01 billion. For Cooperative Bank, it was increased by 29.2 per cent to Sh2.59 billion.

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