Category Archives: NPA

How banks are innovating around interest rate caps

With the capping of interest rates at 4% above the CBK rate comes an opportunity for banks to innovate and protect their income streams. They can do this through increased focus on mobile-based short term credit facilities as well as non-funded income streams.

More people can now afford loans. However, banks are reluctant to offer loans to existing customers who previously met their criteria. More requirements need to be met by customers in order to access the same services. Customers now have a tough time accessing credit cards and (un)secured loans. Perceptions on risk determine who gets the facility with riskier clients getting the short end of the stick.

An F-Type Jaguar at RMA Motors, Kenya

An F-Type Jaguar at RMA Motors, Kenya

Fixed and call deposit facilities are also now accessible to fewer people. New requirements such as that you need to hold an account for a certain amount of time with the bank in order to access fixed deposit services are restricting customers. Long tenures for fixed deposits have also been halved. Call deposits have been put on hold in some cases.

Banks are moving towards shielding themselves from the risk of default that will be brought about by a flood of people who can now afford to take out a loan. Collateral will become a requirement for credit facilities that did not have this requirement before. This is based on the real assumption that there will be a significant degree of default from this windfall.

Banks have also started investing more in Treasury Bills that are risk free and offer roughly the same return that they would by loaning funds to individual customers. This may be a short term move as banks wait for the waters that have been stirred up to settle. It is telling that the 364-day T-Bill is getting the most attention.

Mobile applications that increase accessibility and convenience for bank customers are currently not a significant source of funds. However, they offer an opportunity for lenders as they try to leverage on the volume of loans they have the potential to advance. MShwari-type loans could be the answer to protecting the banks’ funded income. More banks will be willing to join in advancing MShwari-type loans. This will keep people with low credit quality within the formal banking industry. Since most of them are from the unbanked population, they will be afforded some protection from predatory lending by shylocks as has been feared. Only people from selected (read known and established) companies are able to access the same loan facilities that were available to everyone. Likewise, entrepreneurs classified as less risky won’t see a significant change in their access to the facilities that they are used to. Banks have had to cut down on staff that was needed to sell credit facilities. With MShwari-type loans, some of these jobs can be saved.

More focus will be given to non-funded income streams that exist such as prepaid cards. Prepaid cards are touted as a secure way to carry cash. KCB and NIC Bank are two institutions that have put a lot of effort in making these cards mainstream.

Bankers also have the option of contesting this legislation using KBA. They can do this if they can prove that the new rates are making their business unprofitable. This could see interest rate revisions on new and existing credit facilities once in a while. An unseen consequence of this is the Monetary Policy Committee might lose its independence since they have to take into consideration bankers.

In summary, more focus will be given to customers who meet new requirements set by banks. Innovations will also be necessary to drive income growth going forward. After all, operating in white water creates opportunities in making great leaps.

Newton Kibiru, Business Development at Grant Thornton Kenya

Silent Risks in Kenya Banking

Africa Practice has released a report on Kenya banking after great changes in the last year. The report summaries  the concerns  of leaders at banks as:

  • Competition: How a bank remains its unique to attract the right clients and deliver profits.
  • Regulation The  Central Bank of Kenya has become more stringent.

difference in loan repayment

  • Transformation –  One example is the demand by customers for banks to be mobile (and more accessible on technology platforms).
  • Reputation: With three banks shutting down, other banks, and the whole industry have struggled with loss in customer confidence. 

The report was done before the unexpected the signing of the of the banking amendment bill that has borough even more turmoil to the sector, and which has certainly made Kenyan banking less attractive to investors.

Citi Research: Following the interest rates bill, Citi published a report called Kenyan Banks: What’s the Opposite of Hakuna Matata?

(excerpt) ..While there is still much uncertainty regarding the details of how the law will work, of this much we can be confident: it’s bad for banks, and it’s considerably worse for Equity Bank than it is for KCB in our view.

Cytonn Investments:  Published their half-year banking analysis report which looked at the top listed, and unlisted  Kenyan banks.  They found that  KCB has the highest potential return, followed by Housing Finance, Cooperative, Equity and Diamond Trust.

(excerpts) ..there could be some negative effects as result of the interest rate cap but this is not expected to significantly affect banks’ earnings. Also that ..deposits grew faster than loans..levels of NPLs (i.e bad loans) remains a concern..regional operations (mainly South Sudan) under perfomed..we think that the sector has become fairly attractive for a long-term investor. 

Bad Debts in 2016

According to the Central Bank’s Q1 summary,  non–performing loans at commercial banks have increased this year by 15% to Kshs 171 billion in March 2016..Real estate sector recorded the highest increase over the quarter by 42% – attributable to slow uptake of housing units. apartment blockPersonal/household sector registered increases of 21% as a result of negative macroeconomic drivers such as job losses and delayed salaries. The manufacturing sector had an increase of 15% due to slow down in business leading to failure to generate enough cash flows to meet all financial obligations. Transport and communication, agriculture and mining and quarrying economic sectors registered decreases in non-perfomign loans between December 2015 and March 2016. 

Non-performing loans are still only about 6%, but the report also excluded Charterhouse, Chase and Imperial banks.

End Credit Reference in Kenya?

A well-meaning Kenyan has taken a petition to parliament, asking it to disband credit reference bureaus. He complains that they  have listed more than 700,000 individuals in their database as defaulters..causing a lot of anguish to the listed individuals as they are unable to access financial facilities from local banks

Parliament hansard from

Credit reference petition to parliament

Credit reference bureaus have been operating in Kenya for about five now, and this petition comes at a time when many banks have heavily increased their provisions for bad debts in the year 2015.


Barclays Kenya is Not for Sale

Barclays Kenya had a media briefing in Nairobi today, at which CEO, Jeremy Awori,  explained the complex sale, next steps for the bank and addressed industry banking developments.

He explained that Barclays PLC would be de-consolidated in Barclays Africa –  gradually shedding off their ownership from 62% to about 20%, but that this would not affect Barclays Kenya, whose parent bank, board and decision-making were all done by Barclays Africa, based In South Africa. The Barclays Africa Group is in 12 countries including  Kenya, Uganda, Tanzania, Seychelles, Zambia, Ghana, Mauritius, Mozambique and Absa in South Africa (Absa). He also said that Barclays Egypt and Barclays Zimbabwe were directly owned by Barclays PLC – and that these were non-core assets that they PLC was trying to sell. 

In Kenya they are rolling out new strategies, doing stock-broking and agency banking in ways that’s are different from other banks. He was emphatic that Barclays Kenya was not for sale.  Barclays Africa had a value estimated at Kshs 500 – 600 billion, if it was even up for sale, and that no local bank had the muscle to buy it.

He said they had slower growth, than other banks in Kenya over the last few years but it was steady, and deliberate with an underlying intent to have a well-governed, and managed bank that was capitalized and with excellent liquidity. He also said that he did not Barclays Kenya buying other banks, even if they were distressed opportunities. Mergers, the world over rarely pay off for investors, and they would rather grow organically, wooing customers from other banks, instead of buying the customers through the banks.

He said what was happening with other banks recognizing losses was not unexpected; some banks had been growing at 30% and shrinking their provisions, when it was natural that provisions would grow along with loans.

$1 = Kshs 100