Ukraine war sees importers default on loans

James Mwangi, Managing Director of Equity Group (right). [Wilberforce Okwiri, Standard]

Cash-strapped importers have started to default on their loan obligations due to the ongoing war between Russia and Ukraine.

Equity Group chief executive James Mwangi said rising wheat prices, much of which comes from the two warring countries, had made it difficult for some traders to repay their loans.

Mwangi noted that the crisis, which saw Equity move quickly to help local wheat farmers fill the gap left by expensive imported wheat, had unintended consequences.

“And we are seeing the pressure in terms of repayment as cash flow is disrupted,” Mwangi said at the bank’s 18th general meeting held virtually yesterday.

Mr Mwangi said the bank had responded by bolstering its stock of insurance cash in case there was an increase in defaults.

“We have made cash provisions up to 95%,” Mwangi said, adding that the listed lender had also increased loan loss coverage by a further 27%, taking its cover on non-performing loans ( NPL), or bad debts, at 122% using credit enhancement guarantees.

He noted that as a result, the bank is depreciated to the extent of an additional 25% above current NPLs.

“And we very carefully selected the loans that we could amortize ourselves in the event of the consequences of a prolonged impact of both the Russian crisis and the Covid-19 pandemic.”

Soldiers from the Ukrainian National Guard take position in the center of Kyiv, Ukraine. [Reuters]

CBK data shows NPLs, or loans that have not been repaid for more than three months, as a ratio of total loans, was 14.1%, a reduction from 14.2 % the same month in 2021.

The NPL stood at 482.6 billion shillings in April this year.

Mwangi noted that the world has been reset by the Covid-19 pandemic and the Russian-Ukrainian war, with global supply chains broken.

As a result, the cost of inputs such as petroleum, palm oil, fertilizer and wheat have skyrocketed and many traders are struggling to get enough dollars to replenish their stock.

The West’s embargo on Russia, Mwangi noted, had a significant effect on the price of food and energy, given that 35% of grain came from the two warring countries.

“As a result, this inflation, especially in food and energy, is in the range of about a 45% price increase. And this has very significant implications for livelihoods and disposable income for all.

The Russian-Ukrainian conflict was one of the factors the chief executive of some 500 private sector companies cited as a likely slowdown in the outlook for global and Kenyan economic growth, according to a Central Bank of Kenya (CBK) survey. conducted between May 10 and 17, 2022.

However, a World Bank report noted that Kenya’s exposure to the war in Ukraine through direct trade links is low, with Russia and Ukraine accounting for only 2.1% of total trade in goods between 2015 and 2020.

“Similarly, Ukrainian and Russian tourists do not represent a significant share of Kenya’s tourism market,” reads the World Bank’s Kenya Economic Update 2022.

In 2021, the country imported goods worth 37.6 billion shillings from Russia and exported tea, coffee and flowers worth 10.5 billion shillings to Moscow.

An aerial view shows a residential building destroyed by shelling in the settlement of Borodyanka in Kyiv region, Ukraine. [Reuters]

Nevertheless, the banks continued to record astronomical profits in a difficult economic environment caused by the pandemic, the drought, the Russian-Ukrainian conflict and electoral jitters.

This global crisis has contributed to a spike in the prices of fuel, wheat flour, cooking oil, tissue paper, rice, fertilizers, detergents.

Combined with an increase in the prices of maize flour and other locally produced foodstuffs, it contributed to a sharp rise in the cost of living, with overall prices in the economy jumping by 7.1%, the most high since February 2020.