Tough Times for Banks as Builders Default on Loans

Local construction companies have been ranked among the biggest defaulters of commercial bank loans as delays by the government to pay State contractors’ bills continue to take their toll on the building and construction sector.

According to the central bank, big contractors contributed the most to last month’s increase in the stock of non-performing loans, a situation that is likely to get worse due to the current political impasse in the country.

Central Bank of Kenya governor Patrick Njoroge said on Tuesday that real estate practitioners, manufacturers as well as operators in the trade sector were struggling to pay their debts due to the failure of the national and county governments to settle bills.

Dr Njoroge disclosed that two local cement manufacturers and a plastic dealer cumulatively owe banks about Sh5 billion. He also revealed that the real estate has about Sh3.9 billion worth of bad debts – the bulk of which is linked to a golf course and a housing project.

“A lot of these relate to delayed payment by the government, both the national and county, and we expect the numbers to look better as they get paid,” Dr Njoroge said during a press briefing in Nairobi on Tuesday.

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In a bid to cushion themselves from cash flow crises, some contractors are moving away from state-backed projects – in favour of undertakings funded by development agencies.

For instance, H Young & Company Ltd., one of Kenya’s largest engineering contractors, disclosed in a 2015 report by Global Credit Ratings that it was mitigating late payment risks by “targeting projects that are largely development agency funded or contracts for high credit quality international engineering companies, and private sector industrial companies.”

The firm’s interest financing costs stood at over Sh600 million in 2014 due to delayed payments by the government, a situation that saw its operating profit drop to Sh612 million from Sh709 million in 2013.

Industry sources say that construction firms are increasingly finding it hard to obtain credit from commercial banks – a situation that is likely to further slow down the industry.

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