Ukraine war sees importers default on loan payments

Equity Group chief executive James Mwangi (right). [Wilberforce Okwiri, Standard]

Cash-strained importers have began defaulting on their loan obligations due to the ongoing Russia-Ukraine war. 

Equity Group chief executive James Mwangi said that increased prices of wheat, a bulk of which comes from the two warring countries, had made some traders struggle to service their loans. 

Mwangi noted that the crisis, which has seen Equity move swiftly to help local wheat farmers plug the deficit left by the expensive imported wheat, has had unintended consequences.

“And we are seeing the strain in terms of the repayment as cashflows are being disrupted,” said Mwangi during the bank’s 18th AGM held virtually yesterday.

Mr Mwangi explained that the bank had responded by shoring up its stock of insurance cash just in case there is increased cases of loan defaults.

“We have made cash provisions of all the way to 95 per cent,” said Mwangi, adding that the listed lender had also increased loan-loss coverage by another 27 per cent, taking its coverage on non-performing loans (NPLs), or bad loans, to 122 per cent using credit enhancement guarantees.

He noted that as a result, the bank is cushioned to the extent of an additional 25 per cent above the current NPLs.

“And we have really carefully selected the loans that we could cushion ourselves in case of consequences of prolonged impact of both the Russian crisis and the Covid-19 pandemic.”

Servicemen of the Ukrainian National Guard take positions in central Kyiv, Ukraine. [Reuters]

Data from CBK shows that NPLs, or loans that have not been serviced for over three months, as a ratio of total loans, were at 14.1 per cent, a reduction from 14.2 per cent in the same month in 2021.

NPLs stood at Sh482.6 billion in April this year.

Mwangi noted that the World has been re-set by the Covid-19 pandemic and the Russia-Ukraine war, with global supply chains being broken.

As a result, the cost of inputs such as oil, palm oil, fertiliser and wheat have gone through the roof with a lot of traders struggling to get enough dollars to replenish their stock.

The embargo on Russia by the West, Mwangi noted, has had significant effect on the price of food and energy, given 35 per cent of grains came from the two countries in conflict.

“As a result, that inflation, particularly in food and energy, is to the tune of about 45 per cent price increase. And that has very significant implications on livelihoods and disposable income for all.”

The Russia-Ukraine conflict was one of the factors that chief executive of some 500 private sector firms cited as likely slowdown both the global and Kenyan economic growth prospects, according to a survey by the Central Bank of Kenya (CBK) that was conducted between May 10 and 17, 2022.

However, a World Bank report noted, Kenya’s exposure to the war in Ukraine through direct trade linkages is small, with Russia and Ukraine accounting for only 2.1 per cent of total goods trade between 2015 and 2020.

“Similarly, tourists from Ukraine and Russia do not account for a significant share of Kenya’s tourism market,” read part of the 2022 Kenya Economic Update by the World Bank.

In 2021, the country imported goods worth Sh37.6 billion from Russia and exported tea, coffee and flowers amounting to Sh10.5 billion to Moscow.

An aerial view shows a residential building destroyed by shelling in the settlement of Borodyanka in the Kyiv region, Ukraine. [Reuters]

Nonetheless, banks have continued to report astronomical profits amidst a tough economic environment occasioned by the pandemic, drought, the Russia-Ukraine conflict and election jitters.

This global crisis has contributed to a jump in prices of fuel, wheat flour, cooking oil, tissue paper, rice, fertiliser, detergents.

Together with an increase in prices of maize flour and other foodstuff produced locally, have contributed to a sharp spike in the cost of living with overall prices in the economy jumping by 7.1 per cent, the highest since February 2020.