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Kenyan banks face moment of truth as reality dawns after rate cap

By Otiato Guguyu | February 14th 2017

The next two months will be very important for commercial banks as they come to terms with effects of two years in turmoil and possibly risk of closing shop.

March will see the sector announce its full year results after a period loaded with industry shocks, including collapse of three banks and the law capping interest rates.

According to audit firm, PWC, global industry review, powerful forces are reshaping the banking industry, including customer expectations, technological capabilities, regulatory requirements, demographics and economics are together creating an imperative to change. Banks need to get ahead of these challenges and retool to win in the next era.

The PWC industry review cites for major challenges facing banks and financial institutions, with top on the list is not making enough money on investment, or the return on equity, that shareholders require, high consumer expectations, increased competition and regulatory pressures.

But closer home, come the month of April, banks in Kenya will be reporting to the regulator to show if their finances are strong enough to remain in business in the face of the regulator’s tighter controls.

In his latest briefing CBK Governor Patrick Njoroge gave an April ultimatum on banks to present comprehensive reports of their revised business models setting in motion a risk-based approach to banking regulation in line with revised Internal Capital Adequacy Assessment Process (ICAAP) issued in November last year.

“ICAAP has been there for some time now. CBK has just opted to rejig it. It’s all meant to ensure that the amount of capital a bank is holding is commensurate to the level of risk it has onboard,” Head, Banking Research at Ecobank George Bodo said.

The new guidelines give the CBK a say on the amount of capital held by banks with regional operations in a move that may see large lenders seek additional funding.

“The key element is strengthening their business model. If you let people do whatever they want you’ll end up having a lot of copy cats, they do not distinguish themselves to see what it is they are bringing that the others are not. What is my comparative advantage, these are the hard questions and if they do not come up with then they should not be in the business of banking, they should go and grow vegetable or something you know, by the way growing vegetable is a hard business,” explained Dr Njoroge.

Two years ago, Kenya had 44 banks. In August 2015, there were 43 banks, by October the same year, there were 42 and in April 2016 Kenya had only 41 banks with open doors. However, with partial recovery of Chase Bank, the figure has since returned to 42 banks.

Despite the storm that has hit the country’s financial system, most of the banks have endured, showing some level of resilience despite support by the regulator to minimize shocks caused by failed banks.

But in the wake of the storm, what is left are empty shells of some banks, which is a reminder to some of the players whether it makes any business sense to stay open.

The elephant in the room is whether the sector is ripe for fewer banks, and how many can survive the oncoming onslaught of tighter regulations in the sector.
Push for fewer lenders can be traced back to 2015 when Treasury Cabinet secretary Henry Rotich’s proposed to raise commercial banks’ core capital from Sh1 billion to Sh5 billion in three year.

The proposal was shot down by parliament and CS Rotich tried again to reintroduce it but his efforts failed to gain currency. The Central Bank Governor, Patrick Njoroge has been against forced marriages and kept away from Rotich’s proposals.

However the unstable market, may be making a strong case for arranged marriages and Dr Njoroge seems to be warming up to the idea of fewer, but stable banks.

“We expect to see some consolidation across the sector, and believe this process will be facilitated by the CBK – not necessarily through the introduction of new regulation, but by reducing the bottlenecks that usually prolong such deals,” Investment banking firm Renaissance Capital said in a note.

The situation may even be heightened as MPs encouraged by their success in capping interest rates, continue throwing new regulations at the lenders’ way.

Public Investments Committee Kimani Ichung’wa has sponsored the 2017 Banking amendments law that requires the State to strictly bank with lenders where government holds a stake.

The MPs also want to make it explicit that the law caps the annual percentage rate on any facility and not a nominal rate which allows banks to heap on hidden costs.

“Proposed regulations capping APR as per Banking (Amendment) Act, 2016 will have material impacts on non-funded income for banks. Medium and smaller-sized banks will be most impacted. Survival will be contingent on making quick adjustments to the regulations, otherwise they will become perishable,” Mr Bodo said.

Banks have been charging loan processing fees, insurance and negotiations fees to wade off the effect of the rate capping law and maintain high interest incomes.
KCB has introduced a 2.25 per cent negotiation fee levied across all its loan products, while Equity charges an appraisal fee of one per cent that also attracts a 10 per cent excise duty.

Some of the lenders, including Commercial Bank of Africa (CBA) whose product M-Shwari currently has 13 million customers, have even used technicalities on the mobile loans citing that they charge a 7.5 per cent fees and not interest, therefore, the wording of the law exempts them from capping their rates.

According to Standard Investment Bank research team, between 2011 and 2015, the banking industry generated 21.9 per cent of its profit from fees and commission income on loans alone.

For the 11 listed lenders, as at end of September 2016, 14.6 per cent of their total profit was earned from loan fees.

Banks say the new law is a sustained siege on the sector marked by strict reporting of bad loans and an onslaught by law makers that has seen the banking stock index dip by over a half between June 2015 and January 2017.
“In our view, the drop in private sector credit growth to 4.3 per cent year on year, in December 2016 (The average stands at 16 per cent) is a clear manifestation of an industry under siege,” Standard Investment Bank said.

Deepak Dave of Riverside Capital, however, is confident that a number of the banks licensed are able to ride the storm.

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