Banks bullish despite economic slowdown

By Jackson Okoth

The banking industry is poised to record even higher profits this year if financial results for the past year provide any indication.

For instance, Equity Bank has recorded an increase in pre-tax profit from Sh 2.378 billion to Sh5.022 billion for the year ended December 31, 2008.

Also expected to release financial results in the week is Barclays Bank and Standard Chartered Bank, the largest multinational banks in the market.

Banks are optimistic of a good run this year despite the economic slowdown. Photo: George Mulala/Standard

"The business model of high volumes and low margins has proved resilient during hard economic times," said the bank’s managing director James Mwangi, while releasing the results.

The industry has remained bullish against the backdrop of an overall economic slowdown in the country, which has seen GDP growth tumble from 7.1 per cent last year to a forecast of 2.2 per cent.

Meanwhile, inflation had reached its highest level in a decade at 26.2 per cent, effectively wiping out value of money held by bank depositors.

But with interest rates remaining high, the Central Bank of Kenya (CBK) has adjusted various monetary instruments to bring down cost of borrowing.

In a move to increase liquidity and lower cost of credit, CBK has lowered the cash ratio from five per cent to six per cent as well as the Central Bank Rate.

It has also lowered the Treasury Bills (T-Bills) window, allowing investors a minimum of Sh100,000 investment in T-Bills from Sh 1 million, effective from January this year.

CBK says its intention of increasing liquidity in the financial sector so as to provide credit at a lower cost is being achieved.

Securities market

"The liquidity expansion consequent on the December decisions are still in a dynamic phase," says the bank’s Monetary Policy Committee (MPC) report.

Commercial banks have admitted that they will have to offer more attractive rates to clients, to compete with those offered in the government securities market.

Although CBK reduced the Treasury bill bid threshold to Sh100,000, the process of opening a CD account with the bank has not been user friendly, keeping away retail investors.

Figures indicate that total deposits held by the banking industry have surpassed the Sh1 trillion, with liquidity at 34 per cent, compared to the statutory 20 per cent.

Regulatory framework

The recent finalisation of the regulatory framework and licensing of micro-finance institutions (MFIs) is expected to increase competition at the lower end of the market, says MPC.

The committee mentions that while it is satisfied with liquidity expansion, it is concerned that the interest rate structure was still not responding adequately.

The gap between money market rates is too high indicating inefficiencies, says CBK. It is hoped that with anticipated consolidation in the industry through mergers and acquisitions, to meet new capitalisation requirements, institutions will achieve economies of scale required to effectively compete and expand into the increasingly lucrative mass market.

The law requires banks to attain a minimum capital of Sh1 billion by the end of 2010 as proposed in the 2008/09-budget speech.