Kenya’s capital city Nairobi has been even more chaotic than usual in recent weeks as new government regulations take the more decrepit of the capital’s minibuses off the streets, forcing people to walk to work or pay exorbitant fares demanded by surviving drivers. Government regulation and control is also resulting in emotions running high in the banking sector, which is being squeezed by low interest rates on one side and pressure to keep fees down on the other.
“The government gives us all the indications that it believes in a non-controlled banking sector – that’s the official version,” says Adan Mohamed, managing director of Barclays Bank of Kenya and chairman of the Bankers’ Association of Kenya. “Government control is the single biggest problem that is facing the industry in terms of the government’s willingness to play in a free market environment.”
Legislative pressures
Two pieces of legislation are giving Mr Mohamed and his fellow bankers sleepless nights: the Central Bank (Amendment) Act 2000, known as the Nonde Act, which regulates interest rates; and section 44 of the Banking Act, which requires banks to seek government approval for tariff increases. The Nonde Act is the subject of constitutional review over its apparent retrospective commencement date.
“You cannot be criminalised before you are born. That is control in its worst form,” says Mr Mohamed. “The Act was an historical one and is hanging over our heads and we are not sure which way it will go.”
The principle of uncertainty is causing more concern than the content of the legislation, which sets out maximum and minimum interest rates and loan charges.
Terry Davidson, managing director of Kenya Commercial Bank, which is 35% government-owned, echoes the sentiments: “The issue for the banks here in Kenya is the lack of clarity around a bill that was passed by the government about two years ago without a start date and no clarity on the way forward. It sits in the background.
“We have been given assurances that it will not be an issue. We are operating as normal but it is an overhang and contrary to the philosophy of the government in a free market,” he says.
The broader issue of regulation policy also puts the government in between two opposing forces. It is under pressure from donors and the IMF to liberalise further but also faces domestic weight to maintain some control.
Desire for regulation
“What made [the government think these] controls were necessary was the historical problems the sector has had to go through with the effect of a mismanaged banking sector,” says Mr Mohamed. “People’s memories are very fresh, so there is overwhelming support for regulation. This is something internally-generated.”
Still fresh in the public psyche is the $600m Goldenberg scam in the early 1990s, which caused the collapse of a number of financial institutions, reportedly cost the country 10% of its annual GDP and resulted in the suspension of IMF and World Bank support until this year.
“It is really a question of historical baggage that is making everyone nervous. But the evidence is on the table that these controls are not necessary and the government just needs to be convinced of that,” says Mr Mohamed.
Against this backdrop, interest rates have decreased dramatically and their regulation may have been less of an issue if it were not for the growing debate about bank fees and charges. Interest rates have fallen in the past year from about 15% to 2%, with
T-bills trading at about 1.5% and bank lending rates anywhere between 3% for top corporates to 17% for unsecured high-risk lending.
“Interest rates have fallen so sharply and that is making the traditional kind of banking not relevant any more, so we are having to shift to more innovative product ideas in order to grow,” says Citibank Kenya’s general manager Sridhar Srinivasan.
Derrick Ouma, chief financial officer at Commercial Bank of Africa, says: “It is a low interest rate environment and that is of concern to everybody because that impacts significantly on margins. This market has historically been heavily reliant on interest income so we are seeing a gradual shift in strategies. We are looking to expand our non-interest revenue sources and attack our operating costs, and we have to get more efficient.”
Tariff control
This brings in the thorny question of section 44, a remnant from pre-liberalisation days that technically requires banks to get Ministry of Finance approval to increase tariffs. The previous government apparently turned a blind eye to the requirement but under the new government, lawyers are hinting that the rules should now be observed.
“It is an overhang from the past and there are mixed signals about whether it is in place or not,” says Mr Davidson.
Mr Ouma says: “It is there on the statute books and it is something that we are grappling with so the sensitivities are obvious. In law it exists but from a practical point of view I do not see how you can enforce it. The central bank has said it does not want to regulate the industry. They want banks to manage themselves responsibly, but how you define responsible, I do not know.”
Last year the central bank published a study that pinpointed “excessive” charges that were branded in the local press as “arbitrary”. But are fees really that high in Kenya?
“The answer is yes and no,” says Mr Mohamed. “There are banks that actually provide some of the services at a very low cost or for free. In other cases, there are some niche players and customers are willing to play that end of the market and they get charged aggressively. Fees have been a major issue and banks have imposed some charges that seem high to the common man but are not necessarily out of order by international standards. It is all relative to what it has been a few years back when interest rates were high and those fees were not necessary.”
Impact of disclosure
Commenting on the current level of charges, Jackson Kitili, deputy director in the central bank’s bank supervision department, says: “I think they are high. But it looks like they are coming down as a result of the disclosure and now people can know what banks are charging.”
Mr Davidson believes it is a problem of perception. “There is a perception problem that the central bank, the government and the public seems to believe that the fees are high and I think in many cases they have been quite high. Banks have adjusted their fees and the central bank publishes the banks’ tariff structures. There is more and more transparency around it and it just creates a much greater awareness. I do not have a problem with that at all.
“Kenyan banks were generally charging extremely high rates in the 1990s and they did a bad job in managing the public perception and business environment. The country was in a recession, there was no growth and the banks charged very high fees and interest rates, and that resulted in a public backlash and a lot of resentment against the banks. There is far more resentment against the banking industry here than anywhere else I have been,” he says. “Banks were used as political vehicles and the 1990s was not a good time for the Kenyan bank sector and they are paying the price for it.”
Awareness is needed
“From my discussions with the public and the government, there is a lack of awareness. There are far more issues at play than banks charging too much. We have aggressively reduced our interest rates and demand has not picked up. The reason is that there is no demand in the economy and lack of economic activity. The banks have got to do a better job in educating the public and to create awareness in government,” Mr Davidson says.
“The main message is that our day-to-day activities are not being frustrated by regulatory control but there is uncertainty around the legacy that we need clarity on,” he says. However, he admits: “We are not any more regulated than the rest of the world.”
The Bank of Kenya is adamant that controls are not excessive. In denying that the industry is over-regulated, Mr Kitili says that the central bank’s aim was to encourage competition by ensuring that the industry disclosed full details of their charges to the public.
Competition pressures
Competition is intense. Mr Mohamed wants to see the competitive pressures between the country’s 45 banks increase as he believes that will act as a reliable market-driven control mechanism.
However, Mr Ouma foresees casualties from the cut-throat competition. “But it will be hard to predict the timing. You will never know how long a victim will hang on to the last breath,” he says, envisaging a combination of mergers of smaller banks and their takeover by larger players.
The top 10 banks are strong and able to compete with each other, reckons Mr Mohamed. Many of the remainder are small, often one-branch, legacy banks with small niche businesses. If interest rates continue to remain low there will be opportunities for consolidation, he believes.
“Consolidation is definitely required, but whether it will happen, I do not know,” says Mr Srinivasan. “There is too much fragmented play going on in the field and there are just too many banks for the size of the market.”
The sector is starting to recover from the worst excesses of a non-performing loan (NPL) portfolio, however, particularly among some of the bigger state-connected banks. “There has been an historical problem with NPLs. This bank has been aggressively providing for these loans and we are pretty comfortable and we have got very good remedial efforts to collect,” says Mr Davidson.
“Many factors are helping: the judiciary was prone to manipulation and is now more predictable than it was in the past. With the new government, the political pressure on banks to do things that they probably would not normally [have done] has gone, so you can just get out and collect your loans,” he says.
Legacy of abuse
“There has been a lot of abuse of the banks and we are carrying the legacy of that and the issue now is to fix it. Most banks are seeing positive signs and, helped by the low interest rate environment, the carrying cost is a bit less. The central bank has been much stricter in policing of prudential guidelines so banks are being forced to be more and more responsible,” says Mr Davidson.
According to Mr Mohamed: “One of the biggest problems has been the judiciary system and the ability to recover debts through the courts. The government has cleaned up the judiciary.” He admits it is too early to say whether the purge, during which more than 20 judges were fired in a single day, is making debt recovery easier. “The key message is: we are watching. These are the kind of signals we want to see and as a banking system we welcome that,” he says.
Total NPLs for the sector, including banks and non-bank financial institutions, stood at Ks77bn ($1bn) in December 2002, representing 29.8% of total loans.
But Mr Mohamed insists: “The NPL issue has been over-played. They are concentrated with government banks and that is where they are sitting.” Almost half of NPLs are with the big three state-connected banks, Kenya Commercial Bank, National Bank of Kenya and Co-operative Bank of Kenya, whose NPLs accounted for 55.8%, 52.1% and 38.8% of their portfolios respectively.
Barclays held 15% NPLs at the end of 2002 and Standard Chartered reported 8.2%, according to Bank of Kenya figures. The two big international players are clearly approaching the market from different angles, however. Barclays claimed it had twice as many branches (60) as Standard Chartered countrywide, and held a 20% market share in terms of assets and 24% in terms of net advances. Standard Chartered held 14% of the industry’s total net assets and 8% of net advances.
Once the courts prove a reliable mechanism for realising the value of security, NPLs will become less of a problem, Mr Mohamed believes.
Signs of recovery
“But it’s not all doom and gloom,” he says. “The economy has been battered and in decline for the past eight years. Now we are seeing signs of recovery and the banks have been seeing there is a lot of opportunity out there, the judiciary is looking clean, or better.
“The day this market is going to get its sanity back is when people lend money and know they can recover the value of the security,” says Mr Mohamed, citing examples of property with two title deeds and the difficulty of selling repossessed assets. “Once we reach that stage, there is nothing that can stop this market.”
