Why operating small banks in Kenya is a living nightmare

 

After the fall of Chase Bank in April last year, fund managers and Savings and Credit Cooperatives (Saccos) met and decided to withdraw money from small banks.

These boardroom decisions have kept bosses of small lenders fearing a run on their banks as their cash reserves, known as liquidity, wear thin.

Due to distrust from peer lenders and big banks, getting money from the inter-bank market also became hard and expensive. This has left small tier lenders with a massive cash crunch that has threatened to sweep them out of business.

"The 2015 bank crisis eroded market confidence of Tier 2 and Tier 3 banks and as a result, there was a general deposit flight to Tier 1 banks," said Family Bank boss Dr David Thuku. "Generally, customers were looking at a flight to safety of their deposits.”

Small lenders have watched in dismay what a simple WhatsApp message can do in an age when customers are not only multi-banked but can also transfer money at the push of a button on their phones.

Just months after Chase Bank saw panic withdrawals force it to close shop, Family Bank was faced with a similar problem after a rumour caused a run on the bank, which saw it lose Sh21 billion in just five days.

What the small lenders have been forced to do is fight tooth and nail to ensure they are not seen as weak and fall victim to the fate of their peers.

See the figures

"If we meet customers with huge deposits, it is easy to convince them because they see the figures and the business case and understand you are here for the long run," Samuel Kimani, Jamii Bora boss told Weekend Business.

"But you cannot meet all your small customers especially those with less than Sh100,000 who are the majority, they will take their money and go.”

Shoring up liquidity has become so important, that lenders are not worried about profitability preferring to cut lending to boost cash reserves.

Family Bank, which made a Sh743 million loss for the nine months to September, down from a Sh963.3 million profit in a similar period last year, climbed back from its cash liquidity problems to buffer its reserves up by almost 9 percentage points.

In the last quarter of 2016, the lender saw its liquidity dip below Central Bank of Kenya (CBK) recommendations when it tanked at 14.4 per cent in December 2015. It has, however, now recovered to 33.2 per cent, which is 13 per cent clear of CBK guidelines.

Dr Thuku said they focused on deposit growth having returned to the lending market cautiously building up the loan book over the nine months to September to Sh44.3 billion. This was short Sh11 billion during a similar period last year.

"Within the first quarter, focus was given to loan collections rather than loan disbursement in order to shore up liquidity," said the Family Bank CEO.

"This, of course, had an impact in our interest income in the first quarter but, once we reached the desired liquidity level, we re-instated aggressive lending from April 2017 to the level we have now reached averaging Sh2.5 billion in disbursements monthly."

Mid-level and small banks with backing of either the Government or wealthy families and individuals may have an advantage as such clout reassures their customers.

Jamii Bora, which as at half-year, had a liquidity ratio of negative 4.3 per cent, was among the weakest in the sector.

Cash crunch

"Among tier three banks Jamii Bora is different from the family-owned, the lender is owned by 600 shareholders with relatively little capital and who have been buried in the economic downturn,” Mr Kimani said.

State-owned Development Bank whose profits fell by half has been on a serious cash crunch reporting a liquidity ratio dip from 15 per cent in September last year to negative 4.9 per cent in the third quarter this year.

Another State-owned lander, Consolidated Bank has been shoring up its cash to recover from a liquidity deficiency of 19.7 in September last year to 30.1 per cent in the nine months to September 2017.

But as a result, it has cut lending from Sh9 billion to Sh8.4 billion falling further into loss-making territory from Sh203 million in September last year to Sh301 million in a similar period this year.

Most Asian banks are family-owned and operate in tight circles making it easier for them to calm their customers as far as risks are concerned.

Credit Bank is backed by veteran politician Simon Nyachae while Sidian Bank is backed by the Centum brand of businessman Chris Kirubi.

The Centum-backed Tier 3 bank, formerly known as K-Rep, posted a loss of Sh274 million as at September compared to a net profit of Sh220 million made in a similar period a year earlier.

During the third quarter, Sidian Bank’s loan book contracted by Sh429 million to close at Sh11.96 billion compared to Sh12.39 billion recorded in June, according to the lender’s financials published Wednesday.

Another big problem has been non-payment of loans which has been astronomical over the recent past especially after CBK insisted that loans are flagged if they have not been serviced for three months and defaulted if non-payment extends for nine months.

Out of the Sh2.36 trillion gross loans, more than Sh230.6 billion is in the books of banks as non-performing loans (NPLs).

This has been aggravated by the fall of retail chain Nakumatt whose debt to banks, landlords and suppliers stretches to about Sh40 billion. Kenya Airways, which forced its creditors to restructure, had also roped in smaller banks like Jamii Bora.

Jamii Bora had given the troubled airline a short-term loan pegged on a specific transaction: the sale of their hangar space in London. After the sale, only part of the debt was repaid.

“One reason why Kenya Airways debt was kept in the balance sheet is that we told the Government it would strain our books and we told other lenders we simply cannot join them and they understood,” Mr Kimani told Weekend Business. “We have been also more aggressive in recovering other defaulted loans which is bearing fruit."

Even secured lenders are witnessing staggering levels of defaults. Mortgage financier Housing Finance has seen NPLs jump from Sh5.5 billion in 2016 to Sh8.1 billion this year. HF Group’s profits for the nine months to September fell by 81 per cent to Sh159 million down from Sh837 million during a similar period last year.

Delay by the Central Government to release money to the county governments has also been a driving factor to the cash crunch among small lenders.

Most of the small enterprises picking up small tenders to build or repair roads, set up street lights and offer general supplies usually use the Local Purchase Orders to get loans from banks as they wait to be paid by the Government.

However, as a result of bungling in The Treasury and political undertones in Government, a legal conundrum came about with the schedule of disbursement having differing with the County Revenue Allocation Act (CARA). The Treasury has not disbursed to counties their share of revenue until this is corrected.

"A lot of the Sh2.8 billion is from delayed payments both from the national and devolved governments. These have been provided for and initiatives are ongoing to resolve them,” CBK Governor Dr Patrick Njoroge said in a previous interview.

Rate cap

The rate cap worsened the cash crunch for small lenders after fund managers decided to dump all their money in the National Treasury’s purse or ask for a premium when giving the low tier banks.

Bankers say the institutional and pension investors who are giving the Government an average of 11 per cent on Government treasuries would ask for 12 per cent from small banks, which they are expected to lend at 14 per cent.

"The Government is in competition with the commercial banks in their deposit mobilisation space. The high returns on Government securities which are considered less risky by depositors attract funds away from commercial banks," Thuku said.

"Institutional investors, however, still place some of their funds with commercial banks as they seek to diversify their investment portfolios."

This has allowed the National Treasury to borrow very cheaply in the domestic market as banks and investors outbid themselves much to the disadvantage of the private sector.

Mr Kimani said as a result, small lenders have been forced to put much of their money in the same Government paper rather than lend to customers.

Jamii Bora boss, however, said that the trend was unsustainable as it has evidently led to the massive job cuts in banking halls.

"The Government should see this is not the way to go. Banks will be forced to close branches, send people home to cut down expenditure and operate with one Treasury guy who can deal squarely with Government securities,” he said.

George Bodo, a banking sector analyst and currently the head of financial desk at Ecobank says low tier lenders have to readjust and pick up less expensive cash from customers rather than rely on institutional investors and fund managers.

"They need to keep balance sheet funding costs as low as possible-which implies building more low-cost stick current account funds," Bodo said.

"This is especially to Tier 2 and Tier 3 banks who have a penchant for expensive purchased funds."

To survive, Jamii Bora said they have recently raised Sh500 million through a private placement of part of its Sh5 billion rights issue.

"We sold off most of our non-core assets, including the Koinange office branch and our head office.

"The KQ deal is actually part of the remedies we have undertaken because we have negotiated a better position,” Kimani said.

Reduce risks

The smaller banks have also slowed down lending to small and medium enterprises to reduce risks on their books.

"Unfortunately, with interest rate-capping and now the introduction of IFRS 9, we have had to review our lending policy and slow down lending in higher risk portfolios especially the unsecured lending.

"Our desire is to continue extending support to the SME sector which is a pillar in our country’s economic development. We will do this in the context of de-risking the business in order to reduce the impact of IFRS 9 come 2018,” Thuku said.

Importantly, they want to assure lenders that if they turn up at their counters, they will be able to get their money.

"No one has come to get their money and lacked it. We are solving this problem and I believe we will come out stronger," Kimani said.

"Last week, I was surprised we were getting Sh100 million deposit in a day. I think things are starting to pick up now that politics has calmed down a bit."