Equity Group Chief Executive Officer (CEO) James Mwangi.
What you need to know:
Industry leaders are cautiously optimistic about next year prospects, with 2020 Covid-19 economic disruptions having left their trays with unmet targets.
From banking to insurance and horticulture to investment and aviation, the captains of the industries say the year started well but produced unprecedented packet of challenges they wish to forget.
While they look forward for a recovery in 2021 hinged on discovery of various vaccines for the infectious virus, the discovery of mutant Covid-19 in countries such as UK and South Africa is blunting their optimism.
Equity Group CEO James Mwangi says it may take a while for the impact of Covid-19 on the economy to clear and banks will have to remain vigilant to navigate through an environment of rising loan defaults.
“Covid-19 started as a health crisis, became an economic crisis and a humanitarian crisis. We have to prevent it from ending as a financial crisis,’ says Mr Mwangi.
Mr Mwangi says that he expects a recovery next year supported by the loan book growth the lender has had from September. Another recovery point, he adds, will come from reduced provisioning for loan defaults.
Economic hardships
“About 30 percent of this year’s Equity loan book growth came in the third quarter and so we expect revenues from this lending to start reflecting in this fourth quarter,” he says.
Top banks — KCB, Equity, Cooperative Bank, Absa, Stanbic, DTB and Standard Chartered Bank of Kenya — saw a combined 30.2 percent or 22.56 billion decline in profitability in the nine months to September.
Equity spiced up the year by acquiring Democratic Republic of Congo’s BCDC while KCB is set to acquire two banks in Rwanda and Burundi. I&M is also going to acquire a bank in Uganda.
A key headache for banks will however be if the over Sh1.12 trillion or 38 percent of the total loan book that banks had restructured by end of August due to the coronavirus-induced economic hardships will not fall into default status.
In the horticultural sector, flower firms are turning the corner on headwinds that hit the sector from mid-March when airports were shut and export markets in European countries such as Netherlands put under strict lockdowns.
Kenya Flower Council CEO Clement Tulezi says that the sector had initially put June 2021 as the timing of being close to full recovery but the uptick has come much earlier.
Kenya Flower Council CEO Clement Tulezi.
Flower exports hit seven-month high of 12,878.04 metric tonnes in September, earning the firms Sh10.51 billion.
But as 2021 comes, Mr Tulezi is wary about the fresh wave of Covid-19 infections, the high freight charges and the end of tax rebates that government had given the sector to aid in the recovery.
“Government has removed everything it had given us about seven months ago and introduced minimum tax. This is going to eat into the business. This is a big hit for us,” said Mr Tulezi.
In the insurance sector, players are also wary that the Tax Laws (Amendment) No.2, Bill 2020 that wants them to start paying one percent tax on their turnover could cripple their businesses.
Another challenge for the New Year will be the full roll out of risk-based capital (RBC) regime that kicks in on January 1.
The Association of Kenya Insurers (AKI) chief executive Tom Gichuhi says that the RBC, added to the minimum tax, is a recipe that will strain their liquidity.
“Insurance companies have struggled to reach the required liquidity ratios only for them to be slapped with an additional tax that requires a further adjustment to these liquidity ratios. This is a put off to any investor,” said Mr Gichuhi.
Association of Kenya Insurers (AKI) chief executive Tom Gichuhi.
The RBC requirements were introduced to ensure insurers maintain strict liquidity ratios. These requirements have been progressively implemented over the last five years and comes into full force from January
Kenyan insurers pay other direct and indirect taxes including one percent of gross direct written premiums to finance Insurance Regulatory Authority operations.
The insurers also contribute 0.25 percent of the premiums paid by the respective policyholders every month to the Policyholders Compensation Fund.
In addition, 0.35 percent of gross direct premiums written in the general insurance business is charged on policy holders and collected by insurance companies as insurance training levy.
Insurers will also be hoping that the rise in policy surrenders and withdrawals that were seen this year as customers struggled with economic hardships, will reduce in the New Year.
Audit and advisory firm Deloitte warns that consumers in countries such as Kenya are running on tight purses and the temptation to opt out of insurance plans is elevated.
“Insurers need to be prepared for a potential contraction in premium growth arising from corporates cost-cutting on non-essential expenses,” says Deloitte.
In addition, the insures will also be seeking for clarity with brokers over the cash and carry laws with insurers favouring direct collection of premiums from customers as opposed to having it pass through brokers.
Schools shut down
For the education sector, private schools have had a year to forget. Covid-19 forced them to remain shut, denying them the key source of revenue- school fees.
Some 331 schools have so far shut down completely forcing about 55,600 students to seek alternative schools ahead of resumption of learning in January.
Kenya Private School Association chief executive Peter Ndoro says private schools had between May and December 3 borrowed about Sh14 billion to sustain their operations.
He hopes for a better 2021, hinged on resumption of learning but says government is dithering on extending to them low-cost loans as it had promised.
“A lot of investment is required for reopening schools, which is not there. The government had promised private schools a stimulus package in form of low interest credit facilities but it still remains a promise,” said Mr Ndoro.
On the stock market, it has been a year of mixed fortunes. Some firms have gained shares prices at the Nairobi Securities Exchange (NSE) while many lost.
It was the year Covid-19 battered many stocks especially in the banking sector as foreign investors flee.
The combined value of the wealth of investors at the NSE is now above Sh2.24 trillion, beating the pre-Covid-19 level of Sh2.162 trillion.
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