Bad debts bleed Kenyan banks

The dossier, which was presented to Mwiraria in July 2004, showed that a number of banks in Kenya, while looking healthy on the exterior, were in deep financial trouble and had only managed to mask their blemishes by applying “creative accounting” methods.

President Mwai Kibaki’s regime is taking stern measures to stamp out corruption.

These revelations are bound to rekindle the debate about the safety of deposits because innocent savers in the country put their money in banks in the belief that the institutions are financially healthy.

If the situation is that bad, how can an ordinary depositor know where to put his or her money?

The revelations also raise the issue of the integrity and accuracy of the audited accounts that commercial banks publish in the Press regularly, which portray the majority of commercial banks as profitable companies paying handsome dividends to their shareholders.

In the brief to Mwiraria, Mullei disclosed that preliminary assessment of the situation by the central bank had shown that gross non-performing loans had mounted to more than Ksh112 billion (US$1,55 billion) ‘ equivalent to 10 percent of the country’s gross domestic product.

It is a worrisome situation indeed because, with non-performing loans at 34 percent of total loans made by the country’s banking sector, the implication is that three out of every 10 loans made by the banking sector have gone bad.

The severity of the problem is best demonstrated by the level of provisioning that the sector has had to resort to in order to remain compliant to banking regulations and laws.

According to the report, loss provisioning in the sector had by that time reached a whopping Ksh75 billion (US$1,04 billion) ‘ meaning that many banks have tied large proportions of their equity in dead assets.

Kenya’s banking sector is clearly paying a huge price for having no mechanism of exchanging information on borrowers. ‘ The East African.

July 2006
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