Kenyan banks have defied the ravages of the Covid-19 pandemic to report huge profits for a second year.
Is this a sign of post-Covid recovery or are there other underlying factors? Why so much profit in a highly regulated sector?
Are banks the best stocks to own, and are they inoculated against the economic cycles?
When the economy is doing well, we borrow to invest or consume. When the economy is doing badly, we borrow to bridge the gap in our incomes.
In both cases, banks make money from charging interest. But it’s more than that for Kenyan banks. Let’s try and objectively explain what’s happening using crowdsourced knowledge and wisdom.
One, we could argue the worst of the Covid-19 pandemic is over after mass vaccination and people getting “used” to it.
The profits could signal things are getting back to normal. After all, the financial sector (read banks) determine the pulse of the economy. Didn’t we shed off the masks and other restrictions?
Two, it’s possible that we have borrowed a lot to recover from Covid-19-induced losses. That money has earned interest for banks. The pandemic brought job losses as businesses closed down. Are we borrowing to revive such businesses?
Three, banks cut costs by merging branches and moving to alternative channels like internet banking. I do not recall when I was last in a banking hall. They also sent home workers because of the greater adoption of technology.
Does this mean that banks are yet to feel the effect of online lending platforms that recently got into the radar of the Central Bank of Kenya (CBK)?
Or did they learn from them? Is Kenya ripe for virtual banks? Technology seems to suggest that this is the future.
Such online platforms should just get banking licences. Is that what CBK implied with the Central Bank (Amendment) Act, 2021 (the Act), which came into force on December 23, 2021?
If yes, the future has arrived prematurely in the banking sector. That is something to celebrate.
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Four, banks did not pay dividends during the Covid-19 period as advised by the Central Bank. Are they reaping the dividends of a good regulatory framework? Does the law allow shareholders to claim dividend arrears?
Five, the government has been borrowing heavily internally from banks. Such a demand raises interest rates and bank profits. We know many banks found refuge in government paper at the height of the pandemic.
Six, could the adoption of a new accounting standard, IFRS 9, have led to reduced provisions for loans hence the higher profits? IFRS 9 gives banks liberty on how to deal with provisions for non-performing loans.
Seven, an interesting observation is that some banks have lots of uninformed borrowers (information asymmetry) who just borrow and cry later over high interests.
Such borrowers could have contributed to the banks’ bottom line. Eight, could it be a sign that our banks are better managed and by extension good at reducing waste and making better investment decisions?
Remember, you do not just become a bank CEO. Congrats to my former students who are bank CEOs.
Nine, banks might have benefited from regional diversification. Our banks have done the country proud by going beyond the borders into neighbouring countries.
They are real multinationals. Since countries reacted differently to Covid-19, the economic effect was different and so was the impact on the baking sector.
Ten, what percentage of this profit is from “other charges?” If you ever get a mortgage or a loan, you are probably conversant with other charges. Yet, most charges were waived during Covid-19.
Eleven, some say in whispers that ownership could be a factor in profitability. Who are the key shareholders of the leading banks in Kenya?
Twelve, our banks could be making lots of money because they are too few. They have successfully peddled a myth that Kenya is overbanked.
The regulator raised the minimum capitalisation, leading to some consolidation. We need more banks, particularly community banks.
Microfinance banks could have played the role of community banks, but they have not. Didn’t we import the US constitution? Why not import some aspects of the American financial system, like community banks?
Finally, what magic did President Mwai Kibaki do to bring down interest rates and stimulate the economy? What did we learn from our bold attempt to control interest rates?