The borrowing rates in Kenya is so high. In fact the number of companies willing to lend you money are just so many. The lending process is even more easier,it takes just seconds and you have money in your pocket.
This trends have put so many people and businesses in dire debts.
Kenyan banks are increasingly pulling the plug on financially distressed companies, forcing some of them into administration or taking shareholders’ loans to stay afloat, the latest industry data shows.
The trend got traction especially after the capping of lending rates and the subsequent reluctance by banks to lend to firms with weak financial backbones that have traditionally relied on debt refinancing at high interest rates to remain afloat.
Fashion retailer Deacons East Africa is the latest company to go into administration of PKF Consulting after it failed to pay its debt, joining ARM Cement which is now in the third month under the care of PricewaterhouseCoopers (PwC).
Bankers say that while the capping of lending rates slashed the finance costs of these companies on their pre-existing debt, it has been a stumbling block when they try to get new loans to pay off their maturing liabilities.
This is due to the lending rate, currently at a maximum of 13 per cent, almost converging with returns on safer investments in government bonds and T-bills.
“It is better to buy treasuries than to lend to a riskier borrower for the same period given the prevailing lending rates,” said a bank executive who did not wish to be named.
He added that the adoption of a more conservative accounting system (International Financial Reporting Standard 9) has further seen credit rationed to riskier borrowers.
“Under the current system, a borrower’s financial distress will result in immediate provision for the loan. Previously, we would lengthen the repayment period,” the bank executive said.
Deacons had loans of Sh351.6 million maturing this year at a time when it has continued to register lower sales and larger losses attributable to various factors, including loss of franchises.
The credit crunch has seen other companies get loans from their shareholders. Investment firm TransCentury, for instance, received a Sh388 million loan last year from its controlling shareholder, Kuramo Capital.
The government, the top shareholder in Kenya Airways, last year guaranteed new loans of Sh4.3 billion that eight local banks, including KCB, provided to the airline after it defaulted on earlier facilities.
Do you think this will stabilize businesses?