The Central Bank of Kenya (CBK) has levied bank fines against five institutions over transactions relating to their handling of payments and movement of funds sent from the scandal-plagued National Youth Service (NYS).
The banks are Diamond Trust which handled Kshs 162 million, and was fined Kshs 56 million, Co-operative Bank which handled 263 million (and was fined 20 million), KCB which handled Kshs 639 million (fined 149.5 million), Equity moves Kshs 886 million (89.5 million fine) and Standard Chartered which handled Kshs 1.63 billion from the NYS, and which was fined Kshs 77.5 million.
The CBK statement read that the bank fines followed investigations into failures at the banks including; not reporting large cash transactions, not doing due diligence on customers, lack of support documents for large transactions and lapses in reporting suspicious financial transactions to the Financial Reporting Centre (FRC).
Notably missing was Family Bank that featured heavily in a prominent series of transactions of funds that originated from procurements at the NYS. It has been previously sanctioned and branch and senior staff are being prosecuted.
All the banks which handled NYS funds had been named earlier and the CBK statement added that this was not the end, with an additional group of banks set to be identified and investigated.
The simultaneous release on Thursday morning of half-year results of Kenya’s three largest banks portrays a picture of the banks resuming their super profits streak even as the government looks set to repeal interest rate caps later this year.
But the results are deceptive in that the banks have all shown flat growth in loans, despite the growth in customers deposits which have increasingly been channelled towards funding government debt, at the expense of the private sector.
The results showed:
Flat growth in loans: e.g while KCB deposits are up by Kshs 40 billion this year, net loans are actually lower than December 2017.
Decline in assets and capital – as the banks noted that the adjusted capital ratios were due to CBK guidance on IFRS9.
Growth in the diaspora and the East Africa region.
James Mwangi CEO of Equity spoke of the bank’s total income now being ahead of where they were in June 2016 before the interest rate caps were set by Parliament, and that the June 2018 results were achieved despite losing 40% of loan interest income in Kenya. Interest rate caps which were reintroduced in Kenya in 2016 were pushed at a time when large banks were recording “super profits” and which parliamentarians attributed to them charging high-interest rates to borrowers.
Rate caps have enabled government to finance deficit without political cost of rising interest rates. (Un)intended consequence?https://t.co/VOy4Aa9wv6 via @BD_Africa
Another factor has been cost efficiency improvements through digitization and a move away from fixed investments in brick and mortar. Equity also reported that 97% of customer transactions were done outside branches and these accounted for 55% of the value of transactions, and their CEO said that in future, branches will be for high-value transactions, advisory services, and cross-selling products.
With the result of the three, along with that of Barclays and Stanbic earlier this month, we have results of five of the seven largest banks in Kenya and none from the smaller banks. Last year,, the top -ten banks took over 90% of the industry profits. What does IFRS9 portend for the smaller banks?
Central Bank of Kenya (CBK) statistics from the first quarter of 2018 show that there are 120,000 locally issued credit cards and 18 million debit cards/ ATM cards. With interesting patterns of credit cards usage over the last few years, for various reasons, there are some new entrants out to take on ubiquitous Visa-branded cards in Kenya.
MasterCard:GT Bank Kenya is rolling out a series of World MasterCard credit cards. The Gold and Platinum cards come with perks of travel and rewards including international airport lounge access, complimentary nights at 175 Starwood Hotels, luxury apartment discounts and Hertz Gold Plus car rentals along with enhanced insurance benefits that are easy to claim and a 24/7 concierge who offers personalized travel services. There are also tailored dining offers for Diani, Kisumu, Malindi, Mombasa, Nairobi. Ukunda and Watamu as well as towns in Nigeria.
Previously, one of the most-popular MasterCards on the market was the prepaid global card by Nakumatt that was supplied by KCB and Diamond Trust banks. They have been inactive since early this year following Nakumatt’s difficulties that started before the supermarket chain went under voluntary administration.
American Express: Also, Equity Bank and American Express have just extended their 2013 partnership. The bank which issues the American Express Green Card and Gold Card is the sole issuers of the globally accepted American Express cards in East Africa. With the signing of a now exclusive merchant acquisition agreement, Equity will be the sole merchant acquirer of American Express card transactions and will manage all aspects of merchant relationships including acquisition, statements, and marketing. Equity Bank earned Kshs 278 million in AmEx commissions last year, a 54% increase from 2016. The Bank also issues Union Pay, Diners, and JCB cards in addition to Visa and MasterCard.
It elicited a lot of comments on the cost of finance offers to Kenyans, since an interest capping law passed in 2016 that restrict banks to lend at a maximum of 14%, the lack of regulation of app loans who may be taking advance of Kenyans by charging usurious rates etc. It also led to a mention of a research report from Micro Save about the digital credit landscape in Kenya that was shared by one of the authors.
The Microsave Report (PDF) titled “Where Credit Is Due: Customer Experience of Digital Credit In Kenya” had lots of insights. It was drawn from feedback from 1,009 farmers located in 50 villages, equally split between Central Kenya and Western Kenya, and also with an equal number of men and women in the study.
At the end of it, the report makes some recommendations to the Communications Authority of Kenya and the Central Bank of Kenya – such as to control the type of messaging sent by text to consumers, and to require app loan companies to share information and to list all defaulters, respectively.
Habits of Borrowers
There is a preference for Chama’ s, SACCO’s and M-Shwari as a source of funding. App loan amounts are too small for significant investments.
Majority of the customers took up loans to smooth consumption, emergencies or to boost business.
They don’t understand terms and conditions of app loans and they don’t understand credit reference.
There are three types of borrowers: repayers (who pay loans on time), defaulters (who don’t understand the consequences of being listed), and jugglers who take both traditional and app loans – but if they are financially stretched, they are more likely to repay the traditional loans.
Customers have learned to game the system through timely repayment of loans and juggling multiple borrowers.
There is no extra “PIN” required to request and withdraw an app loan and some family members have done this in secret leading the phone owner to default on a loan.
Digital credit usage doubled in Kenya between 2015 and 2016, with awareness and usage of digital credit by far lower in rural Kenya.
Digital credit, which offers privacy, is replacing shop credit and family/ friends as financiers.
The simplicity of the loan application procedures matters; too much information requested or if there are too many variables that make it confusing, makes potential borrowers drop off.
Download a loan app or use USSd
App usage is rather low – and this probably related to lower usage of smartphones as their batteries rarely last a full day as compared to cheaper feature phones that retain battery charge for several days of use.
Phones are mainly used for money transfer, deposits, and withdrawals. There is little usage to get information or to browse the internet
64% of respondents in the survey had a basic phone (57% in 2015). Smartphones were 14%, growing slightly and off-setting feature phones which declined slightly to 26%.
Loss of a phone may result in a borrower defaulting on repayment.
Credit Reference Bureaus
Formal lenders require clearance from a credit reference bureau (CRB) which costs $22 (i.e Kshs 2,200) and that may exclude borrowers from formal finance. App loans don’t require this, e except that borrowers have not been black-listed.
One concern is there is little understanding of credit reference bureaus, and of channels for redress of any disputes.
Not all fintech’s report loans to credit reference bureaus.
App loan costs
High loan/interest charges are not a concern as they are comparable to other informal money lenders
At the time of the survey, M-Shwari issued 62 million loans (worth Kshs 1.3 trillion), while Equitel and KCB about 4 million each. In comments to accompany the release of their 2017 bank results last month, KCB had 13 million mobile customers, Equity Bank has 12.1 million, while a CBA statement noted that the bank also serves 33 million mobile savings & loans customers, in East Africa, in partnership with mobile money operators.
PayPal’s reach in Kenya has now been extended to M-Pesa wallets, allowing users of the service to get payments directly to their mobile phones, thanks to a partnership between Safaricom, PayPal and TransferTo.
Under the new service, qualified M-Pesa customers can link their PayPal accounts to M-Pesa wallets, using an “M-PESA PayPal portal” that will enable them to buy goods and services using M-Pesa to top up their PayPal accounts and this is expected to benefit international ecommerce and remittances. They can also withdraw cash at 148,000 M-Pesa agents around Kenya. M-Pesa has 27.8 million active customers while Nasdaq-listed PayPal has 227 million and is available in 200 markets, allowing merchants to receive funds in more than 100 currencies and withdraw funds in 56 currencies. TransferTo is a Singapore-based cross-border mobile payments enabler.
PayPal has officially been in Kenya for almost five years exclusively with Equity Bank, dating back to 2013 when Equity and FNB were the only authorized Paypal partners in Africa. Equity is still the only bank in Kenya that PayPal users can withdraw with and during 2017, Equity reduced the PayPal withdrawal time from 8 days to 3 days. Last week Equity reviewed the cost of getting paid using PayPal to as little as 1% for withdrawal amounts that are over $5,000 (~Kshs 500,000), versus 1.5% for payments below $500 (~Kshs 50,000).
At the Equity Bank 2017 results announcement last month, CEO James Mwangi confirmed that usage of PayPal by Equity Bank customers had overtaken traditional remittance channels of Western Union and MoneyGram. PayPal was used for payments worth Kshs 6.2 billion in 2017 by Equity customers, up from Kshs 3.6 billion the year before, and accounted for 21% of the Kshs 30.2 billion worth of payments with another new service provider, Wave accounting for 52% of the value of transfers.