The real problem with Kenya’s banking sector

From left: Treasury secretary Henry Rotich, Central Bank of Kenya governor Patrick Njoroge and Kenya Bankers Association chief executive Habil Olaka. PHOTO | DIANA NGILA 

Posted  Wednesday, April 13   2016 at  20:13

In Summary

• More than 70 per cent of the liquidity is in the hands of only a few banks (at the end of 2015 70 per cent of all quick assets was in the hands of only 10 banks in Tier I).
• The level of scrutiny that the financial statements have been subjected to this reporting season has baffled many. Sources have it that the governor has been personally scrutinising these statements.
• Since the new governor has put his foot down, gross NPLs increased by 44 per cent from Sh109 billion in 2014 to Sh159 billion in 2015. More than 10 banks doubled their NPL provisions in 2015 from 2013.

Is Kenya’s banking sector facing imminent collapse? This is the question that millions of Kenyans have been grappling with in the wake of the closure of three banks in a row since July last year.

The answer to that question is an emphatic ‘No’. A close analysis of the entire banking landscape in Kenya reveals an overall rating for the industry of “Good”. This means that overall Kenya’s banking sector remains sound.

The analysis is based on 12 parameters assessing asset quality, capital adequacy, earnings and liquidity. There are, however, areas of weakness that need to be addressed.

Over the past 10 years, Kenya’s banking sector has grown tremendously. Customer deposits have more than tripled from Sh0.57 trillion in 2006 to Sh2.6 trillion in 2015.

Meanwhile, loans and advances to customers more than quadrupled from Sh0.45 trillion in 2006 to Sh2.3 trillion in 2016.

Thanks to the strict enforcement of the central bank’s supervisory role during Micah Cheserem’s reign and the drive for financial inclusion under Njuguna Ndung’u.

But it cannot be denied that recent events have created a certain amount of doubt in the integrity of local banks.

The closure of three banks in a spate of nine months (Dubai Bank in August 2015, Imperial Bank in October 2015 and now Chase Bank) has sent jitters among millions of bank customers.

Since Patrick Njoroge took over as Central Bank of Kenya (CBK) governor on June 19, 2015, it has not been business as usual for players in Kenya’s banking sector.

Dr Njoroge has vowed to clean the sector. The annual ritual of banks sending their audited annual financial returns for vetting at the central bank has proved anything but.

The level of scrutiny that the financial statements have been subjected to this reporting season has baffled many. Sources have it that the governor has been personally scrutinising these statements.

Banks that had indicated profits in reports presented to the CBK have had those reports change to hugely reduced profits or even losses, mostly on account of enhanced provisions for bad debts.

What is ailing Kenya’s banking sector?
First of all, liquidity is not one of them. All banks met the liquidity ratio threshold as prescribed by the CBK. Because sometimes the demand for cash may be more than anticipated, banks make up for this shortfall by borrowing from each other through the interbank market.
The only problem we have with liquidity is the way it is skewed.

More than 70 per cent of the liquidity is in the hands of only a few banks (at the end of 2015 70 per cent of all quick assets was in the hands of only 10 banks in Tier I).

READ: WEHLIYE: How to restore confidence in the financial sector
When there is a confidence crisis like what Chase Bank faced, no bank was going to give them a dime, even as they watched panicked depositors withdraw their cash in droves.