NAIROBI, KENYA: On August 24, 2016, when the banking law was amended to deny banks a free hand in pricing loans, top on their worry was the thought about having to live without the goose that has been laying the golden eggs – the interest income from loans and advances.
Half-year results are already in and the impact of capping the interest rate is clear. Net interest income for most banks has dropped putting a break on the lenders’ growth trajectory that has for long been a normal trend.
All these is happening at a time the sector is grappling with striking a balance between lending and reducing the non-performing loans that are hurting the asset quality. Over a year of trading since the cap was introduced, Financial Standard looks at how banks are coping with the change in law.
• Branch closures
Banks are increasingly moving away from the brick and mortar model that saw them put up physical branches in many parts of the country. Such branches attract fixed costs such as rent and therefore shoots up operating costs.
With banks keen on improving their efficiency, they are now closing some of the branches as they move to consolidate their operations.
Early July, Standard Chartered Bank Kenya announced the closure of four of its branches by the end of August to digitise its processes.
Bank of Africa Kenya (BOA) also announced in January that it was shutting 12 branches to remain with 30 branches.
Barclays Bank of Kenya (BBK) will on October 1 relocate seven branches across the country in a move to save cost. The bank plans to merge the seven branches with other existing ones to improve on efficiency.
“We are reviewing the structure and operation of our business to deliver superior service to our customers and value for our shareholders,” said the bank’s CEO Jeremy Awori on the day he made the announcement.
With the trend picking up, the number of bank branches may drop from 1523 in 2015 to 1,541 in 2016, which is what the sector had by close of this year
• Shedding of jobs
In January, when renowned Australian author Brett King visited Kenya, he predicted that many banks would phase out teller jobs as they follow customers to digital spaces.
“A lot of old skills we had in banking halls like tellers and credit risk officers can no longer be suitable. There is a 98 per cent chance that bank tellers over the next 15 years will become largely extinct,” he said.
At least nine banks have announced job cuts to protect profits. KCB is cutting about 500 jobs to save at least Sh2 billion annually while BBK is expected to cut at least 130 jobs.
Bank of Africa, National Bank of Kenya, Sidian Bank, Family Bank, First Community Bank, Standard Chartered Bank and Ecobank have also announced unspecified staff cuts.
Data from CBK shows that alternative service channels elbowed out a record 2,517 workers from the banking halls in 2016.
On average, in 2015, one employee was serving 972 customers whereas in 2016 an employee was serving 1,209 customers.
• Cutting risky lending, favour government paper
Many lenders are finding solace in government paper. Treasury bills and bonds have come to their rescue as many shy off from customers whose risk is above the ceiling that CBK has set.
“We are moving away from volume lending to quality loans. In times of crisis, cash is the king,” says Equity Bank CEO James Mwangi whose bank recently announced that it will be slowing down on unsecured loans.
Growth of credit to the private sector has touched the slowest pace in over ten years with key sectors such as agriculture, Micro Small and Medium Size Enterprises (MSMEs) feeling the heat.
With government coming to the local market more often to seek for funds, loans are choosing to bet on such lending since the risk of default is unheard of.
• Sharing of infrastructure
Banks are increasingly embracing working together to build economies of scale as well as complete with other financial service providers.
CBK thinks that as institutions continue to devise ways of minimising operating costs, innovations will continue coming up.
“Especially on the backdrop of the recent Banking (Amendment) Act, 2016, robust ICT platforms will continue being a perfect enabler for institutions to offer banking services efficiently,” said CBK in recent report.
Banks have teamed up to form, Pesalink, a switch that enables them to seamlessly move money from one bank account to another. This innovation, now signed up by 26 banks, aims at deepening financial inclusivity at a reduced cost.
KCB and Commercial Bank of Africa have teamed up with Safaricom’s M-Pesa to offer mobile loans while BBK has partnered with Postbank to grow agency banking.
• Roll out agency banking, increase mobile lending
Many banks have rolled agency banking to operate on lean staff as they move to increase efficiency.
By December 2016, commercial banks and microfinance banks (MFBs) had contracted 53,833 and 2,068 agents, respectively. The change implies a 33 percent and 79 percent growth respectively.
The number of agency banking transactions is up 31 per cent to 104 million with the value of transactions rising by 66 per cent to Sh734.2 billion by close of last year.
The trend is increasingly taking shape with major banks in the country shifting away from expensive branch networks. Many are rolling out banking applications.
“A bank is no longer a place you go but what you do on your phone. Branches will only be preserved for advisory and high value transactions,” says Equity Bank boss James Mwangi.
Banks such as KCB, Equity and CBA are increasingly lending through mobile phones as they target small but voluminous loans repaid within a short period.
• De-risking of small borrowers
Instead of shying away from MSMEs and SMEs, banks are now choosing to reduce the level of risk associated with such banks.
A spirited wave of launching SME-centred products instead of labeling them as risky is back.
Lenders are now choosing to de-risk the SMEs through trainings on good book keeping practices, financial management and ethical practices to help such humble businesses grow. This is then followed by loans.
Barclays Bank, Equity, KCB and Standard Chartered have been vocal on this and even setting aside part of their loan book to support de-risked SMEs.
• Venturing into new lines of business
With their traditional revenue stream under a threat, banks are now rolling out new products in bid to diversify revenue streams.
The Co-operative Bank has recently received regulatory approval to enter into a leasing business joint venture with a South African firm, Super Group Limited to offer leased equipment in exploration, infrastructure, manufacturing, construction, transport, and IT.
This, it hopes will sustain its bottom-line. Equity Bank is also riding on partnerships to shield its profitability from the storms of interest rate cap.
It has announced a new business model christened ‘Adjusting and adapting to the new norm’ with growing non-funded income top on its seven-point strategy.
It has entered into partnerships with Mastercard, Visa, Union pay, American Express and Diners Club International to grow its income from payment solutions.
• Reclassify deposit accounts
Many commercial banks moved to reclassify deposit accounts to limit the number of accounts that qualify to earn the seven per cent interest set in the amended law.
Some banks sent out notices to customers indicating that only fixed accounts are qualified to benefit from the deposit interest rate.
All deposit accounts were earning interest at an average rate of 6.92 per cent before the amendment to the law, with deep pocketed depositors negotiating for better returns.
But banks chose to reclassify the accounts and mark savings and current accounts as non-interest bearing transactional accounts to avoid huge interest payments.
• Cut meals, parties and media briefings
Many banks have cut their expenditure on staff parties and media briefings in high end hotels, instead preferring to use communication teams to dispatch releases to the media houses.
Apart from Equity Bank, the first half results has seen the rest of the banks just dispatch results to the media houses instead of making detailed presentations in the city’s high end hotels.
Family bank, which sunk into a loss even sent out as memo to its staff that the afternoon tea had been scrapped off as the bank tries to get back to profit zone.
“Please note that this is not a decision that has been taken lightly, a lot of thought and debate went into making this decision,” wrote the bank to staff.
In June last year, I&M Holdings acquired entire stake in Giro Commercial Bank at Sh5 billion. At that time, the book value of Giro bank was Sh2.95 billion.
Other bank-to bank transactions include SBM holdings getting 100 per cent stake in Fidelity Commercial Bank (Sh2.75 billion) and M Bank acquiring 51 per cent stake in Oriental Commercial Bank at Sh1.3 billion.
On average, the transactions has seen the banks being acquired give away 80.3 per cent of their stake as the sector becomes challenging for the small players with no big access to cheap deposits.