The Indicator

The Impact of Non-Performing Loans in East Africa

In this column called “The Indicator”, we will be taking an economic or financial statistic from East Africa and breaking it down into bite-sized nuggets of knowledge for investors.

This month’s indicator figure is 10.6

10.6 of what?

10.6 is the percentage of loans in the East African Community (EAC) countries that are classified as non-performing using the latest available figures from 2016.  This measure compares the gross amount of non-performing loans to healthy loans with on time repayment.

What are non-performing loans?

Nonn-performing loans are those in which the borrower business or individual has not made a payment in 90 days or more. Typically, these loans are in default or close to default.

What is the larger/broader significance of non-performing loans?

Non-performing loans are a strong insight into the relationship between the credit and business worlds. Loans are more likely to become non-performing as business slows down and becomes less profitable. When non-performing loans rise, it is expected that credit markets will cool down. Credit is the lifeblood of business and any slowdown in credit will have far-reaching consequences for businesses in all industries.

Which EAC country has the highest and which the lowest amount of non-performing loans?

As of 2016, Kenya had the lowest amount of non-performing loans at 6.8%. Kenya has historically strong performance in the credit markets and when non-performing loans were rising in East Africa around 2011, Kenya’s share of non-performing loans was only 6.2%.

Burundi has the highest amount of non-performing loans at 18.5%. This measure is strongly affected by the country’s political instability and its effect on business operations. In 2011, Burundi’s non performing loans rate hovered around 8% and spiked in 2015.

How do non-performing loans in the EAC compare to other regions of the world?

East African countries have much much higher non-performing loans than other parts of the world.  The global measure for non-performing loans was 3.8% in 2016, a decrease from 3.9% in 2015 and part of a broader decline from the dramatic global spike in non-performing loans in 2013.

In Latin America the gross rate of non-performing loans out of total loans is 2.9%. The European Union has a rate of 4%. The South Asian rate is 9.6%. The OECD countries collectively share a rate of 2.7%. North America’s rate is only 1%.

According to the World Bank, Lower Middle Income countries have an average rate of 4.8% while Middle Income and Upper Middle Income countries have a rate of 4.9%. The average rate for High Income countries is 2.5%.

Are non-performing loans in the EAC increasing or decreasing?

Among all member nations, non-performing loans in the EAC have increased by 3.5% from 2015. There was a sharp increase in 2015 in non-performing loans after the slowdown in 2011. Non-performing loans tend to increase as GDP growth decreases, and the EAC member nations experience this trend as do many other countries.

What’s behind the increase in the higher amount of non-performing loans in the EAC?

There are several factors behind the current rise in non-performing loans in the EAC. A drought affecting member nations damaged growth in the agricultural and other sectors of the economy, reducing business growth and economic activity. Lending policies that allow for easy credit access to less than credit-worthy clients increase the occurrence of non-performing loans.

What challenges do rising rates of non-performing loans pose?

Rising rates of non-performing loans indicate slower growth than what GDP growth statistics may lead one to believe.  Typically, when non-performing loans increase, banks focus on consolidating their current portfolios and improving asset quality.  When this happens borrowers experience difficulties accessing loans and refinancing or restructuring loans. In an environment where non-performing loans are high, banks prefer to lend to the government and other perceived “risk-free” borrowers which further reduces the amount of loans in the market in a vicious circle.

Non-performing loans are especially difficult for banks as they complicate bank operations. A bank with a high amount of non-performing loans is more vulnerable to going out of business.

What is being done in the EAC to mitigate the potential negative impacts?

Studies show that countries which reduce the amount of non-performing loans have stronger GDP growth over time.  Kenya, Tanzania and Uganda have changed certain monetary policies intended to reduce the rate of non-performing loans. Kenya capped its commercial interest rates bank can charge consumers. Uganda has cut interest rates in response to this rise in non-performing loans to, in part, make bank lending more affordable.

What are the investment opportunities that emerge from the current credit conditions?

When private businesses and individuals do not repay their loans on time this encourages banks to invest into other more reliable sectors such as government treasury bonds. In addition, banks may increase the requirements for collateralization of loans which may increase the demand for credit insurance guarantees.

As banks seek to take on less risk, due to regulatory reasons such as in Kenya or due to lack of confidence in the businesses seeking loans, alternative lenders such as peer-to-peer lending, leasing companies, or equity investment vehicles will likely fill the gap from reduced bank lending.  If credit tightens in certain markets then assets such as vehicles, equipment, and properties may come available at reduced prices and need for cash.

Lending in East Africa is not for the faint of heart, and instability leads to higher levels of risk.  As risk of one asset class increases, savvy investors seek alternatives to adapt and sustain in the dynamic market that is this part of the world.

How can I learn more?

To learn more about the topics in this article you can visit:

World Bank Nonperforming Loans:


About the authors:

David L. Ross is Managing Director of Statera Capital and US Ambassador to the Open University of Tanzania, Adjunct Professor of “African Venture Funding” at Carnegie Mellon University in Rwanda, and active in growing companies in Eastern and Southern Africa through primary investment, investment advisory, strategic partnerships, and executive education. Connect on LinkedIn at or at

Catherine Mandler is a Senior Analyst at Statera Capital. Connect on LinkedIn at or at

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