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Kenya’s banking sector held up during a tricky 2020. But the sector's ability to return to previous profitability levels depends on length of lockdowns. 

Although Kenya’s banking sector remains generally sound, the extra pressures generated by the pandemic have led to a jump in the non-performing loan (NPL) ratio and require close monitoring.

The country has a total of 43 commercial banks. The sector is moderately concentrated with the eight biggest banks accounting for around 75% of the system’s assets, according to Fitch Ratings. At the end of 2020, the banking system’s balance sheet stood at Ks5.4tn ($50bn), up from Ks5.2tn at the end of 2019 — of which, loans and advances amounted to Ks2.99tn, according to the Central Bank of Kenya (CBK).

“There are two factors in particular that make the banking system a healthy one: the high capital adequacy ratio (CAR) and the strong liquidity level,” says Habil Olaka, chief executive of the Kenya Bankers Association (KBA), the country’s main industry body. “Banks had not been lending a lot and were awash in liquidity when the pandemic hit. That helped them to weather the storm last year.”

The commercial banks had an average CAR of 18.4% in August 2020, compared to 18.3% in August 2019 and above the 15% regulatory minimum, according to the World Bank. The central bank sets a liquidity ratio stipulating that more than 20% of total liabilities must be held as liquid assets, but the system’s current liquidity ratio is around 54%, according to the KBA.

Supporting measures

The CBK took several measures last year to try to shore up the banking sector after the pandemic hit, but Covid-19 still took its toll on the system. In March 2020, the central bank lowered the banks’ cash reserve ratio from 5.25% to 4.25% to free up around Ks35.2bn for commercial banks to support their distressed customers, according to the Parliamentary Budget Office.

The central bank set the fees for mobile transactions of less than Ks1000 at zero to disincentivise the use of cash and approved a credit guarantee scheme to support lending to small and medium-sized enterprises, with an initial seed capital of Ks10bn over two years.

In April 2020, CBK’s Monetary Policy Committee (MPC) lowered the central bank rate, the benchmark lending rate from 7.25% to 7%, and it was still at that level in April 2021. Liquidity in the economy had jumped by 16.7% by the end of November 2020, compared with the same month the previous year. The average bank’s deposit rate rose slightly to 6.31% in January, having fallen to an eight-year low of 6.3% in December, according to the central bank. The average return offered by banks to short-term savers also rose marginally to 2.73% in January, from a five-year low of 2.7% in December.

Banks had not been lending a lot and were awash in liquidity when the pandemic hit

Habil Olaka, KBA

On March 27, 2020, the CBK provided commercial banks and mortgage finance companies with guidelines on loan reclassification, and the provisioning of extended and restructured loans (Banking Circular No 3, 2020). It said that banks would be allowed to extend loan repayments for their customers for a period of almost one year (ending on March 2, 2021), but that the cost of the restructuring and the extension of loans had to be met by the banks.

The amount of loans whose repayment terms were changed by lenders reached Ks569.3bn (or 19% of the system’s total loan book) by the end of February 2021, having dipped from Ks1.7tn (57% of all loans) at the height of the crisis, according to the CBK.

On March 23 this year, the central bank said that commercial bank borrowers would have an extra three months to start servicing loans and extended the loan restructuring until July 3 (the change only applies to loans that were being serviced by March 2 this year, but went into arrears afterwards). It added that at least 95% of borrowers were servicing the debt they owed by the end of March.

“The CBK will continue to closely monitor the unwinding of outstanding restructured loans to ensure the continued stability of the banking sector,” it said in a statement in March.

Problem loans

The system’s NPL ratio jumped during the crisis last year. By December 2020, the gross NPL ratio hit a high of 14.1%, up from around 12.6% in December 2019, and is likely to break the 16% ceiling by June as some borrowers — primarily smaller borrowers and those in vulnerable sectors — default on their loan obligation, according to the MPC. The ratio had risen to 14.5% by the end of February, according to the central bank. NPL rises were noted in the real estate, agriculture, personal and household, and manufacturing sectors this year.

“Some of our clients — in particular in the hospitality and food industry — have been suffering a lot during the pandemic,” says Kariuki Ngari, chief executive at ‎Standard Chartered Bank Kenya. “To support our clients, we extended credit moratoriums valued at more than Ks26bn, which is 21% of our net loans and advances. Around 91% of the restructured loans have now come back to normality. We expect our bank’s return on equity (ROE) to rise again this year, but this will depend on how long the latest lockdown restrictions last.”

Standard Chartered Bank Kenya had a ROE of 11% in 2020, compared to 17% in 2019, according to its own figures. Its NPL ratio rose to 15.1% in December 2020, up from 13.9% in 2019.

Kenya’s top nine listed banks (KCB, Equity, Co-operative Bank, I&M, Absa Bank Kenya, NCBA, Standard Chartered Bank Kenya, DTB and Stanbic Holdings) raised their provision for NPLs by a record Ks77.3bn for the year ending December 2020, cutting their combined net earnings by 25.5% to Ks81.2bn, according to their financial results.

NCBA reported a 42% dip in post-tax profit to Ks4.6bn, after it increased its bad loan provisions by Ks20bn. Absa Bank reported a 44% drop in profits to Ks4.1bn, after it more than doubled its loan loss provision to Ks9bn. Equity Bank reported an 11% drop in post-tax profit to Ks20bn for the same period. Co-operative Bank also reported a drop in its profits (24%), as did Standard Chartered Bank Kenya (33.9%) and Stanbic (18.6%).

KCB Group, the country’s biggest bank by assets, reported a 22% decline in net profits to Ks19.6bn last year. The bank’s bad loan provisions tripled to Ks27.5bn from Ks8.8bn over the year, while its NPLs surged to Ks96.6bn from Ks63.4bn. It reported a gross NPL of 14.7% for the year ending December 31, 2020, up from 10.9% a year before.

Kenyan banks had an average return on assets (ROA) of 2.2% last year, against 3.4% in 2019, according to Fitch Ratings. Average ROE plummeted from 20.38% in March 2020 to 15.59% in June 2020, according to the CBK.

“Provisioning will rise in 2020 in anticipation of higher NPLs,” said Moody’s in its Kenyan banks outlook report in September 2020. “We expect Kenyan banks’ ROA to drop toward 2% over the next 12 to 18 months, from above 3% in the past. Recurring profitability will nonetheless remain strong and absorb higher provisioning charges without eroding capital.”

Charles Mudiwa, chief executive at Stanbic Bank Kenya, says: “I think as soon as the Covid-19 crisis happened, the banking sector expected NPLs to become elevated. The NPL ratio probably has not peaked yet; it all depends on how long the current lockdown lasts. I am reasonably happy with my own bank’s profitability given the circumstances. It shows that we are fairly resilient and I am looking forward to some more growth this year.”

Credit recovery

The industry’s credit growth rebounded last year after the removal of the lending rate cap in November 2019, despite the pandemic. The cap had constrained credit growth by encouraging low-risk sovereign investments over private sector loans and larger customers over riskier micro, small and medium-sized enterprises (MSMEs). Credit to the private sector surged at an annualised rate of 9.3% in January — the highest since June 2016, according to the CBK.

This reflected the continuing recovery of the economy from the Covid-19-induced slowdown of 2020, but the rise could be brought to a halt by the social restrictions introduced in March this year. The highest credit growth was recorded for the consumer durables segment at 18.7%, with loans to agriculture, transport and communications, manufacturing and finance and insurance also recording double-digit annual growth.

“I think the lending rate cap is inconsistent with the spirit of a free-market economy,” adds Mr Ngari. “Regulating interest rates is very ineffective in driving credit growth; in fact, there was a big contraction in lending to the private sector to as low as 2.4% in 2017 and 2018 during the lending-cap period. The banks are now moving towards a risk-pricing model, where the rate is decided according to a person’s individual risk rating. In this way, you do not price everyone at the same level.”

Terry Karanja, treasury associate at AZA Finance, a currency trading solutions provider in Nairobi, says: “The cap on the lending rates was scrapped because it ended up reducing access to credit for a majority of borrowers. Banks were not able to effectively price their lending risk and so they responded by limiting credit access to any client deemed higher risk.” She adds that current interest rates at commercial banks range from 14% to 16.5%.

“At the end of last year, we were seeing a fairly steep rise in credit growth,” says Stanbic’s Mr Mudiwa. “Local tourists were returning to beach resorts and we were seeing a pick-up in imports. Our clients were becoming more confident. Stanbic’s Purchasing Managers’ Index was around 53% — much higher than the 40% level we saw for most of last year. However, with the latest social restrictions, some of that optimism may have faded.”

Mr Olaka agrees that the amount banks lend depends on economic circumstances. “We establish a strong, unambiguous causal effect of bank credit on economic performance,” he says. “Under the conditions of constrained borrowers seeking accommodations on their existing obligations and deteriorating asset quality, banks will likely take a conservative view regarding credit expansion going forward.”

Serving smaller businesses

MSMEs are the lifeblood of Kenya’s economy and employment, and make up around 40% of gross domestic product, according to the Kenya Association of Manufacturers. The country has around 7.4 million MSMEs in total; however, they face several constraints to growth, including limited access to finance because of a lack of adequate collateral.

At the end of last year, we were seeing a fairly steep rise in credit growth

Charles Mudiwa, Stanbic Bank Kenya

The 2018 World Bank Enterprise Survey identified that banks in Kenya require collateral worth 240% of the loan amount for 88% of small borrowers. During the lending cap regime, it became more difficult for smaller companies to access finance and the situation got worse during the Covid-19 pandemic. At the same time, the greater risk aversion of financial institutions (especially toward MSMEs) had made it harder for MSMEs to access finance.

In 2019, the Kenyan government set up a credit guarantee company with the objective of de-risking MSMEs through a partial credit guarantee scheme (PCGS). “PCGSs are a widely used policy tool to facilitate access to finance by creditworthy MSMEs, which would have been denied credit in the absence of sufficient collateral,” said the World Bank’s Enterprise Survey report. “PCGSs are particularly relevant and effective when there is enough liquidity in the financial system, yet it does not flow to some sectors or segments because there exists a high level of (real or perceived) credit risk.”

Mobile money

Kenya has one of the most advanced mobile money sectors in Africa, and saw its mobile money transfer volumes and user numbers accelerate during the Covid-19 pandemic. In January 2021, the country had some 66.6 million registered mobile money accounts, up 12.5% on the previous January’s figure of 59.2 million, according to the country’s Communications Authority. Kenya National Bureau of Statistics shows mobile money transactions in the first six months of 2020 rose to Ks2.144tn from Ks2.136tn in the same period in 2019. The monthly volume of person-to-person transactions jumped by 87% between February and October 2020, according to the CBK.

The country’s strong mobile money and highly innovative fintech sectors have helped it to achieve up to 83% financial inclusion, compared with only 50% in Nigeria, according to the online savings platform PiggyVest.

Kenyans living and working abroad sent a record amount of money home last year despite the pandemic. Diaspora remittances reached Ks28.6bn in February 2021. Overall, remittances surged by 11.4% to Ks351.5bn for the year to February 2021, from Ks307.6bn for the same period last year.

The M-Pesa platform, which belongs to South Africa’s Vodacom and Kenya’s leading telco Safaricom, now accounts for 33.6% of the latter firm’s earnings, second after voice calls which contributed 34.5% of Safaricom’s service revenue last year.

Kenya’s banking system demonstrated considerable resilience during the pandemic, but just how long it will take for the profitability of banks to return to its previous level depends on the length of the current lockdown. During the past year, the banking system’s NPL ratio reached an uncomfortable level, and the banks and the financial authorities must work hard to bring it down again.


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