Non-performing loans (NPLs) are expected to rise sharply thanks to a tax-induced economic slowdown.

Experts say the implementation of new tax measures will most likely depress consumer incomes, triggering discretionary spending while hitting their ability to meet expenses including the servicing of loans.

Reduced consumer spending sets up businesses, especially small and medium enterprises, for lower sales volumes, impacting the ability to meet loan repayments.

“There is going to be much more to come (in asset quality deterioration). It’s all in the lack of economic activity. I have been here for a week and I can tell you Nairobi is not buzzing,” Kato Mukuru, the head of frontier research at EFG Hermes said in a recent interview.

“I understand the idea behind tax increases is to increase tax revenues, but this is comparable to whipping a dead horse. It is not the right time to do it. I think if economic activity does not return, we could easily add another three to five percentage points to the NPL ratio.”

The ratio of gross non-performing loans remained elevated at 14.5 percent at the end of June having eased slightly from 14.9 percent.

According to statistics from the Central Bank of Kenya (CBK), loan recoveries have been noted in transport and communication, agriculture, manufacturing, personal and household sectors.