This archive report was first published on 27 October 2021.
Commercial banks in Kenya have significantly reduced their loan exposure to state-owned enterprises (SOEs) amid increased default risk.
According to the latest Central Bank of Kenya (CBK) data, banks' net loan book to parastatals fell for the third consecutive month in July, closing at Sh76.3 billion, the lowest since February 2017.
This decline in the loan book to parastatals indicates that the value of maturing loans is higher than the fresh lending to many of the loss-making parastatals.
CBK reported in its Financial Sector Stability Report for 2020 that a decline in profitability and cash flow problems has led some state entities to tap loans to meet expenses such as salaries.
As a result, the reduced lending to parastatals has cut the credit exposure to the public sector, excluding the national government, to Sh83 billion, the lowest level in five years.
CBK noted that state-owned entities' long-term debt to assets and long-term debt to equity ratios have declined, exposing banks to vulnerabilities, given that SOEs are among the top 10 largest borrowers.
"This may indicate that SOEs used long-term debt to meet operational expenses rather than investing in assets, thus limiting productivity, expansion capacity, and profitability," said CBK.
"The decline in profitability and cash flow problems exacerbates indebt either a deficit or a loss in the financial year ended in June 2020," CBK added.
State entities such as East African Portland Cement, Mumias Sugar, Kenya Power, Kenya Airways, and Kenya Railways have struggled to pay lenders their money in the recent past.
International Monetary Fund has been pushing Kenya to start rolling out reforms in state-owned entities, including trimming the headcount to make their business models sustainable.
