Country FilesEast & Hornkenya: New challenges on the horizon

Mon,22Oct2018

Posted on Wednesday, 03 October 2018 10:48

kenya: New challenges on the horizon

By Morris Kiruga in Nairobi

NEW CHALLENGES ON THE HORIZON

Banks are fighting the interest-rate cap and the government's push for a tax on large transactions as they implement new financial standards and continue to roll out mobile lending products

 

The past two years have been turbulent for the Kenyan banking sector. From a new and tougher head at the central bank to an interest-­rate cap, the sector has had to adjust to reduced growth in customers and profits. In 2017, the overriding arch of heightened political activity complete with back-to-back presidential elections slowed the economy, forcing banks to innovate constantly to keep the numbers up.Top Kenyan Banks

In the first quarter of 2018, all but one of Kenya’s top five banks reported growth in profits. The most impressive by far was Equity Bank Group (#59), which reported a 21.7% rise in net profit. Not only was it the country’s most profitable bank, but its loan book grew by 3.5% and its purchase of government debt grew by 33%.

By mid-year, Equity had undergone several significant changes in its leadership, which pundits see as a move towards succession and future growth. Its founder and chairman, Peter Munga, made a surprise announcement of his retirement in June after leading the board since the bank’s founding as a building society in 1984. Another major change was the appointment of former Nairobi deputy governor Polycarp Igathe as chief commercial officer after a short-lived career in politics. Some analysts say it could be his first step towards eventually taking over the leadership of the bank.

Technology wins

Equity’s biggest rival, KCB Group (#46) reported 14.1% growth in profits to KSh5.1bn ($50.6m) for the first quarter of 2018, placing it in second place. KCB remains Kenya’s most valuable bank by assets. It has banked on technology, such as its partnership with Safaricom on KCB M-Pesa and mobile banking. As of December 2017, more than half of KCB’s transactions were done through mobile devices.

Credits: YASUYOSHI CHIBA/AFPFor Co-operative Bank of Kenya (#76), which reported a 6.25% rise in net profit for the first quarter of 2018, the going has not been as easy. It has been cutting costs and looking for efficiencies since about 2014. Its 2017 profits were KSh1.3bn less than in 2016, an effect of the politically charged year. Co-operative Bank’s customers now stand at 7.2 million, and more than 87% of the bank’s transactions are done through its mobile app and agent network. One of the few glimmers of hope for a better 2018 is that the bank’s South Sudan subsidiary, in which it is the majority shareholder, posted a KSh32.4m profit in the first quarter of 2018, a much better result than the more than KSh34m loss it reported last year.

One of the most promising top-tier lenders has been Commercial Bank of Africa (CBA, #123) which has ridden on the success of M-Shwari, its mobile lending product in partnership with telco giant Safaricom, to grow exponentially (see profile).

For Barclays Bank of Kenya (#104), the biggest challenge has been balancing its looming rebranding – with the retreat of Britain’s Barclays from the African continent – with competing with its peers. Earlier this year, the bank launched a mobile lending app of its own called Timiza. Uptake has been low, with just a little more than 3,000 downloads from Google Play as of July.

Another top-tier bank undergoing significant changes is Stanbic Holdings (#115), which announced a net profit of KSh1.9bn for the first quarter of 2018. Stanbic, like other top banks, reported a slight dip in profits in 2017 as a result of increased non-performing loans (NPLs). It made KSh4.3bn in 2017, less than the KSh4.42bn it made in 2016, and far from its high of KSh5.7bn in 2014.

‘Robin hood’ tax

The bank’s majority shareholder, Stanbic Africa Holdings, is currently in talks to increase its shareholding from 60% to 75%. In March, it offered to buy out other shareholders in a willing-seller scheme at KSh95 per share. At the time, the listed lender was trading at KSh83 per share.

The only bank among top Kenyan lenders to post a decline in the first quarter of 2018 was Standard Chartered (#100), which reported a 10.5% drop in profits. Chief executive Lamin Manjang told local reporters that he attributed the slowdown to “increased investment in our ‘Digital by Design’ strategy and loan impairment, which is now on an IFRS 9 basis.”

IFRS 9, a series of new international banking standards, came into effect early this year and has significantly changed how banks account for provisions for NPLs. It was only one of several factors that are bound to affect the prospects of lenders this year. The 2018/2019 national budget introduced a ‘Robin Hood’ tax of 0.05% on transactions above $5,000. Banks immediately went to court to stop its implementation, arguing that it would “disrupt business for customers of all banks and damage the Kenya economy,” in the words of the Kenya Bankers Association (KBA)’s lawyer, Kenneth Fraser.

In the same budget speech, finance minister Henry Rotich also proposed doing away with the lending interest-rate cap, which has been in place for two years. Sentiment is still divided on the rate cap, with its supporters demanding its retention to protect consumers from exorbitant rates. Among its biggest opponents, however, has been the International Monetary Fund, which points out that it has shrunk lending to the private sector. Banks have instead preferred to feed the government’s voracious appetite for debt.

A predicted wave of mergers and acquisitions as a result of the rate cap has not materialised, with only one significant acquisition in the works this year, compared to three in 2017.

After a tumultuous election year, the macroeconomic prospects going forward are not rosy, especially as external debt repayments begin to fall due. The role of banks in supporting the private sector through credit will be even more important, although little is being done to ease access to credit and banking services.

In some instances, the clock is actually moving backwards. In June, the KBA issued a list of new rules on high-value transactions for its member banks. The rules came as a response to the ongoing war on corruption in the public sector, which has seen the country lose billions of shillings to public officials and their accomplices in dubious deals.

Under the new guidelines, any transactions between KSh1m and KSh10m requires approval by the branch manager, while those higher than that must be approved by the individual bank’s head of branch banking. Customers who want to transact $100,000 and above in cash must submit a three-day written notice with an explanation of the source and destination of funds, as well as why real-time gross settlement cannot be used.

The tighter rules, even more stringent than the central bank’s existing guidelines, are meant to curb money laundering and illicit financial flows. By self regulating, the banking sector hopes to reduce its liability and strengthen the efforts to curb corruption. 

 

 

From the September 2018 print edition

Photo: Kenya’s government wants to protect its citizens from debt, but what about its own wild spending? 
Credits: Yasuyoshi CHIBA/AFP



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