CBK raises red flag on high household debt

Central Bank Governor Patrick Njoroge. [David Gichuru, Standard]

Central Bank of Kenya (CBK) Governor Patrick Njoroge has warned that household debt has risen to unsustainable levels, compounded by the economic effects of the Covid-19 pandemic. 

Speaking to Members of Parliament yesterday, Dr Njoroge said Kenya is witnessing a crisis in household debt largely fuelled by unregulated digital lending platforms.  “We are concerned that there is a ballooning of debt in the private sector,” he said.

“We are not talking corporates, we are talking households. Particularly with Covid-19, it’s quite problematic because the sources of income have been truncated.”

Njoroge said that while unregulated digital lenders account for a small fraction of the entire industry’s loans, the mushrooming of service providers necessitated the Central Bank of Kenya (Amendment) Bill, 2021.

“We have more than 100 unregulated digital lenders and about 8.3 per cent of the household population in the country use the credit channels,” he said. 

“There is a bit of chaos in the borrowing and lending patterns where people will probably go to three or four lenders borrowing from one to repay another and when they get into trouble the whole process collapses.” 

The governor was giving his submissions to the National Assembly’s Departmental Committee on Finance and National Planning over the new rules that seek to bring unregulated digital lenders under the watch of the CBK.

If passed, the law would enable the CBK to prescribe new liquidity and capital adequacy ratios for digital lenders, as well as put a cap on recommended interest rates levied by the service providers. “High indebtedness among borrowers is a significant issue that needs to be deflated gently, and one of the reasons is the interest rates,” Njoroge said.

“We need to manage the interest rate system to make sure we do not destabilise private sector debt.”

Central Bank Governor Patrick Njoroge. [David Gichuru, Standard]

According to data from the CBK, personal and household loans advanced by the banking sector stood at Sh843.5 billion as of the end of December last year, out of which Sh70.1 billion was classified as non-performing. 

A report by the CBK and independent think tank Financial Sector Deepening released recently said 42 per cent of households missed meals as of March 2021 as a result of Covid-19 lockdown measures, while 37 per cent reported reduced savings.

In addition to this, one out of three medium-sized entrepreneurs reported turning to mobile banking, with digital overdraft facilities such as Safaricom’s Fuliza recording significant upsurge in usage. 

The CBK has recommended that Parliament shelves the Central Bank of Kenya (Amendment) Bill, 2020 in favour of the version gazetted in April 2021, which is clearer in scope and is limited to unregulated service providers.

Growing sector

Njoroge said the Bill is also an opportunity to rein in the growing sector even as service providers continue to expand and evolve their business model.

“In our discussions with fintech, we have actually seen they are moving to other areas and combining with other institutions, giving them more energy in that space,” he said.

“We also need to look five or 10 years from now where there may be one of these digital lenders that becomes quite large and at that point, they’ll need some capital stability and some roots in Kenya.

“We need clarity and power to insist on liquidity and capital.”

Central Bank Governor Patrick Njoroge. [David Gichuru, Standard]

Njoroge further said amendments contained in the proposed law will assist to put in place mechanisms against money laundering and terrorism finance. 

“We want to be strategic in terms of the regulation to ensure we don’t stifle innovation and the first area relates to consumer protection,” he said.

“People have died because of this and been driven to desperation, and we can’t say it’s an open market and abandon them.” 

The parliamentary committee is expected to table its report on the law in the coming weeks, with the CBK saying it is ready to begin enforcement as soon as the president assents to it.