On March 22, The Banker interviewed Central Bank of Kenya governor Andrew Mullei, during which the confident and relaxed governor discussed the persistently strong domestic currency, inflationary pressures and the health of the banking system, among other topics.
Days later, however, on March 24, Mr Mullei was suspended, amid allegations of corruption. His case is pending but rumours and innuendo swirl around him. He denies any wrong-doing.
It would be tough to script a more sensational conclusion to The Banker’s visit to the country, specifically to investigate why the real economy – and the banking sector in particular – are in relatively good shape despite a chaotic and deteriorating political scene.
Mr Mullei’s suspension appears ominously consistent with international newspaper headlines deploring Kenya’s seemingly unstoppable decline, riddled with corruption and hostage to political inertia. But in the same manner that the country had weathered more serious scandals earlier this year, the news was greeted with a mood more like guarded optimism. The governor’s suspension, said pundits, was further proof that the country’s corrupt officials were finally being brought to book.
Similarly, when fresh revelations dramatically claimed the scalp of finance minister David Mwiraria on February 2 (and later the ministers of energy and education), the Kenyan shilling traded stronger to a two-and-a-half-year high against the dollar. Information that should have shaken the markets was being cast as positive.
The reason for this is a subtle shift in sentiment – after many hollow promises, ordinary Kenyans are gaining confidence that corruption can be curbed. Despite fears – even expectations – that there are more damaging revelations to come, there is a new militancy to attacking the problem, particularly in the press.
Which is why a raid in March by government heavies on the offices of the Standard Group, one of Kenya’s leading media groups, elicited unprecedented condemnation from a cross section of Kenyan society, including leading figures from within the government. Masked men disrupted broadcasts of the group’s Kenya Television Network, stopped its presses and destroyed copies of its newspaper. Inexplicably, the government managed only to incite further popular demands for accountability.
Opening government
“Although the highly publicised corruption scandals are shocking and put Kenyan politicians in a very bad light, this juncture in Kenya’s history could actually symbolise a change in the constitution of the country’s politics. Never before have such detailed revelations been discussed so freely in the media,” notes a report from Standard Bank, the South African banking group with a presence in Kenya.
The upsurge of people power goes back to 2002, when the National Rainbow Coalition (NARC), a united opposition group, defeated the African National Union (Kanu), which lost its near 40-year uninterrupted grip on power. Mwai Kibaki was installed as president, promising a relentless assault on corruption, which at the time was so bad international donors had frozen aid payments. NARC’s poll win triggered a euphoric recovery in confidence and with it, local investment.
Political uncertainty
But divisions in the coalition soon surfaced, coming to a head before the November 2005 referendum that was a vote to entrench more power in the presidency. After losing the referendum, Mr Kibaki sacked his entire cabinet, purging it of coalition partners. In the process he plunged Kenyan politics into uncertainty. Mr Kibaki now clings to power in parliament and depends on the disunity of the opposition to maintain his majority. With many pressing needs, Kenya can ill-afford a political impasse at this point.
Kenya’s economy saw quick recovery after the 2002 election, benefiting from a co-ordinated reform programme developed in conjunction with the International Monetary Fund and World Bank. It was centred on restoring macroeconomic stability, which has since been a critical underpinning of confidence.
Last year, the economy grew by 5.2%, up from 4.3% in 2004. Output was up in the country’s key sectors of tourism and agriculture, as well as telecommunications, energy and construction.
In Kenya’s large, cumbersome banking sector, earnings to some extent reflect the buoyant real economy. Last year, banking sector profits were up 48% to Ks20.1bn ($280m). Though the banking system currently constitutes 41 commercial banks, the three biggest – Barclays, Standard Chartered and Kenya Commercial Bank (KCB) – account for more than half of all profits earned.
In 2005, capital and reserves of the banking sector increased by 16.2% to Ks82.1bn. Total assets increased 10.3% to Ks583.3bn while loans and advances were up 10% to Ks283.6bn. The ratio of non-performing loans to total loans ended 2005 down at 17.6%.
Banks benefited from monetary conditions. The central bank targets money supply to control inflation, using open market operations to control liquidity. Rates on the benchmark 91-day Treasury Bill averaged well over 8% in 2005, a considerable increase on the 2.6% average in 2004. Easy money was to be made simply investing in government paper.
But that really is only half the story. Yields had in fact been easing from a monthly peak of 15.3% in February 2001 to a low of 0.8% in September 2003. They remained generally low and stable until November 2004 when the central bank began to restrict liquidity in response to inflationary pressures, in the process pushing up yields. Before 2002, single-digit yields were almost unknown; for most of 2003 and 2004, yields had fallen into the low single digits, forcing banks to look at higher yielding risk assets.
The consequence of this has been to force Kenya’s numerous banks to become more competitive in terms of deposit mobilisation (to secure the cheapest funds) and lending. Interest margins have narrowed, service levels and innovation have improved and the mid-market banks are looking for strategic tie-ups. As Isaac Awuondo, managing director of Commercial Bank of Africa, puts it, it was the end to lazy banking and investing in government paper.
Stabilising measures
It is a situation bankers prefer, as long as the economy is growing. They unanimously cite the improvement in macroeconomic stability as the reason behind the recent economic recovery. Many have also been encouraged by other improvements, such as strengthening of the judiciary that has meant cases are now being heard.
In terms of the big three banks, it is the ongoing turnaround story at KCB that is most eye-catching. It reported a 111% rise in pre-tax profits to Ks1.95bn. Part of this improvement is attributable to increased investment in stronger-yielding government securities, but KCB has also benefited from a post-privatisation overhaul. The government gave up majority ownership in 1998, by selling down its stake from 60% to 35%.
Barclays, the biggest bank in Kenya, reported a profit before tax of Ks5.4bn, a modest dip on the year. Standard Chartered reported a 31% rise in profits before tax to Ks3.5bn.
Laissez faire
The turnaround at KCB offers some perspective on how far Kenya has come since 2002. “By the late 1990s, the bank had a non-performing loan ratio of 60% – it was a victim of the last regime,” says managing director Terry Davidson, describing the political meddling the bank endured. “In contrast, I have had no political interference and have been left to manage the problem.”
But while Kenya’s banks have enjoyed a good period of growth, no-one is suggesting the country is on a sustainable growth path. The outlook is uncertain. “The Kenyan economy has done well but has ultimately under-performed relative to its potential,” says Standard Chartered’s Michael Hart. He believes the 2002 election outcome bolstered sentiment, leading to a consumption boom and investment in inventories.
But there were no ‘mega investments’ that substantially transformed the productive capacity of the economy. “Looking forward there is enormous potential, and it has to start with infrastructure. But this needs to be led by government, and right now we do not have an agreed strategic agenda. The government is not unified behind its own economic plan,” he says.
Inevitably, say Kenya’s bankers, new investment will tail off ahead of the elections next year. That is more lost time. But as the 2002 elections showed, Kenya’s private sector is like a coiled spring waiting for the right conditions to be unleashed.
Sustained recovery of Kenya’s economy is crucial not just to its own development needs but to the wider region too. Without a strong Kenya, there is little hope for the fortunes of the East African Community, which includes Tanzania and Uganda. In April, the heads of state of the three countries approved a timetable for the formation of a common market, committing to a January 2010 deadline for its official launch. Beyond that, a unified political federation has been mooted.
In today’s terms, the common market would be worth $40bn, with a total population of close to 100 million consumers.
Kenya is the lynchpin. It is the largest and most diversified economy; it has the most developed financial system; it possesses the best skills; and its infrastructure – for the moment at least – is the most advanced. By comparison, the manufactured value-added per capita in Kenya is almost double that in Tanzania, the next biggest economy.
“Without the private sector, there would be no Kenya,” says James Macharia, managing director of NIC Bank, bemoaning the government’s habit of making a hash of things. Politicians won’t go away; the hope is that intensified scrutiny will improve their performance.
