As at December last year Kes515.7 billion shillings borrowed in Kenya was not being paid back, a majority by the big Kenyan companies who make up 82.8 per cent of the banking industry non-performing loans.

Small businesses, numbering 1.18 million had just defaulted on Kes90.4 billion and on average had a lower rate of default than the industry average.

So when Equity Bank announced it had placed TransCentury and the East African Cables under receivership and administration for defaulting on Kes4.8 billion debt, concerns of wider market cracks are ticking.

East African Cables is a subsidiary of TransCentury and both companies are publicly listed at the Nairobi Securities Exchange (NSE) which makes the takeover significant.

The sudden rise in Kenya’s non-performing loans is being driven by struggling corporates facing declining market demand against an upsurge in costs over taxes and supply chain dislocations.

Late payments on government contracts and higher tax demands from the Kenya Revenue Authority have also meant businesses operate on thin cash flows.

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Meanwhile, these companies are now facing a new challenge of mounting finance costs on account of rising interest rates as the Central Bank of Kenya hiked interest rates 250 basis points over the last year to combat inflation.

Stanbic Purchasing Managers Index stood at 49.4 points, below the benchmark of 50 points but a slight improvement from April as companies stocked up ahead on new tax changes. The business managers told Stanbic they accumulated stocks despite high input costs on depreciating shilling and rising fuel prices led to a record increase in purchase costs for business in May.

Corporates struggling to make ends meet are coming up with an aggressive banking and supplier demand for settlement of obligations that may yet escalate industry bankruptcy.

According to the Business Registration Service data, the number of creditors rushing to court to petition companies for insolvency has risen sharply even as the number of companies voluntarily seeking bankruptcy protections remains very high.

Creditors petition for the courts to declare errant borrowers bankrupt rose to 10 in the period between July 2022 year to April this year, compared to 5 in the 12 months to June 2022 while debtor’s applications increased to 13 from 11 last year.

This shows that increasingly other suppliers besides banks are keen on safeguarding their exposures to struggling companies as default risks rises.

As regulators and politicians assess the potential risks this poses to the economy, they should be keen on strengthening Kenya’s company law on insolvencies to facilitate business recoveries.

Kenya’s Insolvency Act was meant to protect businesses from bankruptcy giving them an opportunity to bounce back from defaults. However, the success of recoveries in Kenya has been limited as receiverships are run aground in litigation. The costs of sustaining the insolvency practitioners who number just over 30, meaning they are swamped with several companies they have very little operational knowledge on how to run.