Buoyant financial sector predicts a rosy 2022 after Covid recovery

Financial sector players, including banks, Saccos, insurers and digital lenders expect a continued rebound in 2022 pegged on improving economic activities amid persisting Covid-19 infections.

Kenya will in March mark two years since the pandemic struck the country. But CEOs and regulators in the financial sector say the sector has turned the corner.

For banks, their results validate their point that while 2020 was a survival year and 2021 a recovery one, the New Year presents an opportunity to consolidate the gains.

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Kenya Bankers Association (KBA) Chief Executive Habil Olaka says the rebound during the year was in line with the clearing economic hardships among businesses and individuals.  

“In 2021, not only did provisions for defaults go down because the future was looking better than in 2020, but also a number of provisions were reversed. The accounts have been recovering from Covid-19,” he said.

With non-performing loans dropping and businesses in sectors such as agriculture, manufacturing and real estate stepping up their activities, the banking sector believes it will be at the forefront in taking the economy to the next level.

Mr Olaka said banks have now positioned themselves to support the growth segments of the economy, such as micro, small and medium-sized enterprises.

“Banks provide the oil that lubricates the moving parts of the economy. So as the economy continues to pick up, banks can provide the necessary liquidity. This coming 2022 should be a much better year compared to 2021,” he said.

For digital lenders, it has been a year of mixed reactions. They have spent the whole year outside credit reference bureaus (CRBs) after the Central Bank of Kenya (CBK) ejected them in April 2019.

In the absence of CRB, digital lenders said the motivation for customers to repay loans dropped, forcing them to cut lending.

But they are closing the year on a good note after CBK published draft Digital Credit Providers Regulations, 2021 that will, among other things, usher them back to CRB platforms.

“We started the year unregulated, but we are closing on a positive note. We are excited about the prospects of working together with the Data Commissioner and CBK next year,” said Digital Lenders Association of Kenya Chairman Kevin Mutiso.

“I expect a significant increase in lending to individuals and MSMEs (micro, small and medium-sized enterprises) from us because now there is predictability.”

But commercial banks and digital lenders will have to put up with the freeze on the listing of defaulters of Sh5 million and below until September 2022, a move CBK warned could suppress credit growth.

Then there is the election fever and the fresh spike in Covid-19 cases as the New Year starts.

“Over time, players in the productive sectors of the economy tend to adopt a wait-and-see attitude because of the possibility of violence or excitement that accompanies the electoral process. If the pace of economic activities slow, then demand for credit slows. That is the downside,” said Olaka.

Kenya Deposit Insurance Corporation Chief Executive Mohamud Mohamud is closing the year with two lenders to liquidate—Chase Bank and Imperial Bank.

It is also the year the banking sector migrated to risk-based premiums, where the money paid to insurer customers’ deposits are now pegged on each lenders’ risk profile.

“We expect banks to be more alive to risk. They will have to identify risks and mitigate them so that they are not charged higher premiums. I expect banks to reconfigure their risk management frameworks,” said Mr Mohamud.

“We are also alive to cybercrime, which is taking a toll on banks. Banks will have to up their game because that is going to be the biggest risk going forward as the big shift to digital transactions continue.”

For insurers, 2021 was a mixed bag, especially now that insurance, as a risk transfer mechanism, has come in handy for life and health covers as the pandemic continues.

Customers with long-term policies tapped loans from such covers to cushion themselves from economic hardships, according to ICEA Lion Life Assurance CEO George Nyakundi.

“Life insurance companies have also paid out huge amounts to members of retirement benefits schemes,” said Mr Nyakundi.

Reinsurers have in the process become stricter in policy wordings and pricing to protect balance sheets of both the cedents and reinsurers from the volatility of claims. Nyakundi expects reinsurers to rein in insurers practising price undercutting, which has led to losses in classes such as motor. 

“Reinsurers may have come in to rein in errant underwriters, and the industry may see motor rates being slightly adjusted upwards,” he said.

Claims in classes such as motor vehicle and medical have risen in line with recovering pace of economic activities and increased hospital visits.

Regional CEO at Jubilee Holdings Julius Kipng’etich also looks back at the year with mixed feelings.

“We were very flexible with our customers on products such as life to accommodate customers who were still distressed by Covid-19 disruptions to sustain the policy,” he said.

The Insurance Regulatory Authority (KRA) suspended the rollout of the capital adequacy regulatory framework to allow insurance companies to recover from the effects of the pandemic.

Eyes will now be on the regulator on whether the framework, which was initially to start in January 2021, will be implemented in 2022.

“In the coming year, we see consolidations in the insurance sector. If you look at the solvency ratios, some of the insurers are in distress. That may trigger mergers and acquisitions,” projected Mr Kipng’etich.

He sees drought clearing and fuel prices stabilising, taking pressure off the economy that is set for the General Election.

“I expect a smooth election, but psychologically, investors may postpone key decisions because we are going to have a new President and therefore new policies. That is likely to slow down the economy,” said Kipng’etich.

For Saccos, the improving economic activities in 2021 have helped them post recovery from the previous year when layoffs and salary cuts saw many members default on loans and halt savings. Kenya National Police Sacco Chairman David Mategwa said this year’s performance was an improvement and expects the momentum to be sustained in the New Year.

“Despite Covid-19, this year has been better compared to 2020. We have seen more activities on the reopening of the economy and see it getting better next year,” said Mr Mategwa.  

“We have seen an increased appetite for development loans. For our Sacco, the rise in development loans was by more than Sh5 billion,” he added. Mategwa expects the Sacco to close the year with assets of about Sh45 billion and nearly Sh50 billion next year on increased uptake of its mortgage product and enrolment of new members from Administration Police and General Service Unit.

At the capital markets, it has been a year of recovery, with the value of investors’ wealth at the Nairobi Securities Exchange (NSE) having appreciated by over Sh433 billion since January.

The year also saw the bourse’s market capitalisation hit an all-time high of Sh2.921 trillion on August 17.

NSE also launched several innovations, including day trading, where investors can buy and sell shares on the same day.

“That is going to enhance liquidity, and we are progressively looking at other areas. We are focusing on enhancing the growth of our current products,” said NSE CEO Geoffrey Odundo.