Loan defaults plague Kenya’s construction industry

The government should commit itself to paying contractors on time.
The government should commit itself to paying contractors on time. PHOTO/FILE
The Kenyan construction industry players are defaulting big-time on loan repayments, a situation that has been attributed to the high lending rates offered by commercial banks.

A Central Bank of Kenya report released on Wednesday shows that the building and construction sector topped the list of sectors with the highest rise in non-performing loans (NPLs) in the first quarter of 2015.

“The sectors that experienced the highest increase in NPLs [in quarter one] were building and construction and real estate, whose NPLs increased by 28 per cent and 20.4 per cent respectively,” said the CBK report.

The building and construction sector accumulated Sh12.9 billion worth of bad loans between January to March this year, up from the Sh9.9 billion NPLs recorded in the previous quarter.

The real estate sector registered Sh14.8 billion worth of NPLs during the first quarter of the year, up from the Sh12.4 billion bad loans recorded in the preceding quarter.

A loan is considered non-performing if it remains unserviced for more than three months.

The surge in bad loans is mainly attributed to the prevailing high lending rates that are offered by local commercial banks, which stood at an average of 16 percent during the period under review.

“The spill-over effects of high lending rates and challenges in the business environment in the first quarter contributed to the increased NPLs,” said the CBK.

Bad loans in the sector have also been attributed to delayed payments by the government to contractors.

The Kenyan construction sector expanded 13.1 per cent in 2014 compared to 5.8 per cent a year earlier, according to the Economic Survey 2015.

The growth was mainly supported by robust growth in property development, a vibrant real estate sector and the ongoing infrastructure projects.

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The construction growth was also reflected in cement consumption which rose 21.8 per cent to 5,197 thousand tonnes in 2014, driven by increased construction activities.

The industry contributed 4.8 per cent of Kenya’s GDP, which increased to Sh5.36 trillion from Sh4.73 trillion in 2013 – representing a nominal growth of 13.3 per cent.