Banks' rule over finance sector unhealthy

It is that time of the year when key players in the banking industry converge in Nairobi to discuss and address key issues affecting stakeholders in the sector.

Today and tomorrow, the men and women from the big end of town will converge in Nairobi for the Kenya Bankers Association's Third Annual Banking Research Conference whose theme this year is "Putting Banking at the Centre of the Economy's Sustainable Growth".

The banking sector in Kenya has seen a significant boost in its overall existence over the last few decades. This has seen it contribute to a large extent to the economic development of the country.

However, there are a number of issues that the bankers, the regulator and the other industry stakeholders would need to address if this year's theme has to make sense.

First, banking services still dominate Kenya's financial services industry. A big percentage of financial system assets in Kenya are managed by commercial banks, leaving only a small portion to non-bank institutions such as the capital markets, pension funds, and insurance. This creates high dependency of corporate and household financing on bank lending.

The dominance of the banking services industry shows the financial services industry in the country has not developed much. A financial services industry that is dominated by banking services is vulnerable to economic upheavals, because banks borrow short and lend long.

Also, the intermediary role played by banks in the country is not satisfactory in light of the low domestic credit to private sector-to-GDP ratio, which is less than 40 per cent, compared to more than  100 per cent in countries such as Singapore, Malaysia, Thailand and other Asian countries that we want to benchmark ourselves against.

Furthermore, the structure of bank funding is still dominated by deposits, which leads to the high cost of funds, which then translates to higher bank lending rates.

The banking industry should help and would need to play a bigger role in the boosting of investment in segments other than deposits, such as the capital market or other non-banking financial services.

That way, the composition of bank funding would shift more to savings, whose cost of funds is cheaper. An underdeveloped financial services industry will likely make way for market monopoly, which would create inefficiency within the industry and hurt consumers.

This inefficiency in the financial services industry would then make people avoid formal services and prefer the informal ones, such as loan sharks, which would only lead to increased poverty.

Second, the rapid growth in the banking sector vis-a-vis the economy in general poses a systemic risk and may in fact be counter-productive. In the past it would have been safe to presume that bank profits were a function of economic growth; not in the current circumstances, because the results our banks have been posting in the last decade have not been commensurate with the country's GDP growth which lags the growth in the banking sector.

According to Central Bank of Kenya Bank Supervision Report of 2013, Kenya's banking industry has increased its asset rate by about 15.9 per cent from Sh 2.33 trillion in December 2012 to Sh 2.70 trillion in December 2013, whereas the country's economy has only inflated by about 4.7 per cent during the same period.

The ideal long-term growth of assets in a system should be equal or within the same level as the GDP growth rate.

But in Kenya, the growth in the banking industry has been outpacing the country's GDP growth. And there is a reason to be concerned about this excessive growth imbalance.

Our banking industry assets have been growing, sometimes more than three times faster than the economy. This could threaten the stability of the sector as bank borrowers could find it difficult to make their loan repayments in the future.

As the bankers come together to pat each other on the back for yet another fantastic year for the sector, it is absolutely vital that they help address this imbalance between the country's GDP and the banking industry's growth by coming up with proactive measures to tackle the issues of cost and access to credit.

Otherwise, they will find themselves in a situation whereby they would have to constantly increase their bank's capital investments to be able to withstand any financial drawbacks.

This is because an imbalanced growth between the banking sector and the country's economy may result in the increase of numbers of non-performing loans, as both business and consumer borrowers may become unable to pay their loans.

As I have always noted, the bankers must see provision of affordable credit to the economy as something that is in their own interest. No matter the good growth rates and strength of the banks, a weak economy is a serious threat to financial stability and will not be in the long term interest of the banking sector.

It is not feasible to talk about long-term stability of the banking sector without a strong and prosperous economy.

One of the major sources of funds that keep banks going is interest payments from the private sector. A weak private sector is a serious threat to financial stability and will not be in the long term interest of the banking sector. These are the issues the boys and girls from the big end of town must address.

They are issues that are core to their own long-term survival.