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An audit report by Auditor-General Nancy Gathungu, it has been disclosed that the Agricultural Finance Corporation (AFC), a state-owned development financier, is contending with issues of defaults and loans deemed unrecoverable. The report points to governance and financial stability concerns within the AFC, highlighting that seven directors defaulted on KES 35.8 million, now considered irrecoverable.
During the fiscal year ending June 2022, AFC granted loans amounting to KES 54.9 million to seven directors, with six of them defaulting on KES 35.82 million, constituting 65.2% of the total loan sum. The audit report refrained from divulging the identities of these directors or their current status within the organization, leading to inquiries about AFC’s governance practices.
Gathungu stressed that despite adhering to the existing credit policy by disposing of attached securities, the defaulted loans were classified as non-collectible. Moreover, the Auditor-General expressed concerns that the provision of KES 5,955,000 made on directors’ loans may be insufficient.
These defaults occur amidst broader challenges for AFC, as nearly one-third of its total loans are now in arrears. As of June 2022, AFC had disbursed KES 9.9 billion in loans, with customers defaulting on KES 3.1 billion, resulting in a default rate of 31.0%. This rate surpasses the commercial banking sector’s gross non-performing loans (NPLs) ratio of 13.9% in 2022 and exceeds the recommended maximum NPL ratio of 15% for African development finance institutions.
The revelation of these defaults and unrecoverable loans poses a significant threat to AFC’s financial stability, emphasizing the necessity for robust governance and risk management practices within the organization. The Auditor-General’s report is anticipated to trigger a more thorough examination of AFC’s operations and prompt measures to address the challenges impacting its loan portfolio.
