Signs that the Kenyan economy is pushing its citizens to the verge of survival.

Signs that the Kenyan economy is pushing its citizens to the verge of survival.

In recent years, Kenya has experienced a concerning trend: an increasing number of its citizens are resorting to taking loans to meet their basic needs. The rising cost of living, coupled with high-interest rates and new statutory deductions, has pushed many Kenyans to the brink of financial distress. This alarming situation is a cause for concern not only for individuals and families but also for the banking industry as a whole.

According to John Gachora, the chairperson of the Kenya Bankers Association, there has been a noticeable shift in borrowing patterns among Kenyans. Instead of borrowing for long-term investments or capital expenditures, more individuals are seeking short-term loans to cover their day-to-day expenses. This shift is a clear indication that the affordability of loans is declining in the face of rising living costs.

The scenario becomes even more worrisome when considering the impact of increased monthly deductions on borrowers’ ability to meet their basic needs. Many employees find themselves breaching the Employment Act of 2007, which stipulates that deductions from their pay should not exceed two-thirds of their total salary. The increased appetite for survival loans has the potential to exacerbate the problem of non-performing loans (NPLs) in the banking industry. The fear is that borrowers who rely on survival loans may also be obtaining loans from digital lenders, further increasing their debt burden.

Data from the Central Bank of Kenya reveals that the NPLs ratio, which represents the portion of loans for which interest has not been paid for at least three months, reached a 16-year high of 15.3 percent in October, with a slight decline to 14.8 percent by December. This high ratio reflects the growing financial strain on borrowers and raises concerns about their ability to service their loans.

The consequences of relying on loans for basic needs extend beyond the individual level. It has significant implications for the overall economy, as well. When individuals are forced to borrow just to meet their daily expenses, it is an indication that their monthly income is insufficient for basic survival. This jeopardizes their ability to repay loans and, in turn, affects the stability of the banking sector.

The cost of living in Kenya has been rising steadily, outpacing the increase in the minimum wage. While the minimum wage saw a 12 percent increase in 2022, the cost of the minimum wage basket rose by an average of 22 percent, with food expenses being the primary driver of the cost. Furthermore, salaried workers have experienced additional deductions, including increased National Social Security Fund (NSSF) contributions and a 1.5 percent housing levy deduction on gross pay. Deductions towards healthcare insurance are set to rise further, putting an additional burden on workers’ take-home pay.

In addition to the rise in deductions, the banking industry has also raised its interest rates. For example, Equity Bank Kenya has increased its rates to a maximum of 26.74 percent. This means that borrowers now face higher monthly servicing costs. The combination of increased deductions and higher interest rates has created a challenging environment for borrowers who rely on their payslips to secure loans.

In light of these challenges, banks are urging borrowers to exercise caution when considering new debt. Instead, they suggest that borrowers reorganize their activities and seek longer loan repayment periods to create some breathing room for survival income. However, this solution may not be feasible for everyone, as it requires careful financial planning and discipline.

The situation in Kenya highlights the harsh reality that having a job is not always enough to keep individuals and their families out of poverty. Working Kenyans continue to struggle with low wages, inadequate job quality, and the inability to keep up with the rising cost of living. This has led to a significant portion of the working population being categorized as extremely poor, moderately poor, or near poor, according to the International Labour Organisation.

In conclusion, the increasing reliance on loans to meet basic needs in Kenya is a cause for alarm. It reflects the financial distress faced by many individuals and families as they struggle to keep up with the rising cost of living. The banking industry must be attentive to this trend and take necessary measures to mitigate the risks associated with high levels of non-performing loans. Additionally, policymakers should address the underlying issues driving this trend, such as low wages and the inadequate provision of social support. Only through comprehensive and sustainable solutions can Kenya ensure the financial well-being of its citizens.

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