Interview: Lamin Manjang, Joyce-Ann Wainaina and Jeremy Awori
In light of the recent challenges, how would you evaluate performance in the banking sector?
LAMIN MANJANG: I think that the speed to which Imperial, Chase and Dubai Bank were put into receivership by the Central Bank of Kenya (CBK) has raised a lot of concerns about the health and stability of the banking sector in Kenya; it started with Dubai Bank being taken over, followed by Imperial Bank and most recently Chase Bank. There are two things that have emerged from this. The first issue is in regards to the quality of information that is being reported from these banks. Non-performing loans (NPLs) have really come out as being an issue and banks have started recognising them the way that they should. The second issue that has been raised is the issue of governance; things like insider lending, misreporting, or outright fraud are of great concern Our view is that the CBK is doing the right thing by cleaning up the system where they have seen challenges, and in the case of Chase Bank, we are pleased with the progress it has achieved. This shows that the actions of the CBK were successful in their intentions to clean up the banking sector and increase stability. I do not believe we have a systemic problem in the sector as a whole, but I do believe that all stakeholders of the industry play a vital role in ensuring its overall health.
JOYCE-ANN WAINAINA: Kenya has had a long period of stability in the banking sector. The last time that we had a significant period of instability was in 1998, but for the last 15 years we have experienced a long era of stability. It was only until last year that this uncertainty occurred. To put this into perspective, these banks only represented about 6% of the total market share by assets, which is not significant. When you look at why these banks went down, they either had challenges with their compliance, leadership, or governance. The significance of this event was not about the size of the banks or their presence in the market; it was more about having a crisis of confidence in banking in Kenya. With this being said, I do not believe that this necessarily threatens the financial stability of the banking sector. The liquidity challenge certainly had an impact in the market, but we were more interested in the response that was taken. What we saw was that the CBK stepped in and adequately dealt with those banks that were facing challenges, which was really important for the overall stability of the sector as a whole.
JEREMY AWORI: The banking sector in Kenya is largely stable. I think that we should be careful not to mix up unrelated events such as those that happened with Chase, Imperial, and Dubai Bank. These are not representative of the banking sector as a whole. I would say that the banking sector has experienced a bit of turbulence, which has created some anxiety within the market. However, we should not forget the underlying outlook in Kenya’s banking sector is good in terms of capital adequacy and liquidity ratios. That being said, I believe we have not yet felt the true financial effects of the interest cap. Already, we are seeing that bank profits have gone down, but we have yet to see the full impact – which we expect will be felt in the first half of 2017. Some banks were not profitable before the cap in interest rates took place, and now they are struggling with even lower margins; this is creating an even more challenging environment, especially for the Tier-3 and Tier-4 banks as they have thinner capital bases. All in all, there is optimism in the market but there will certainly be a period of adjustment.
What steps should be taken to ensure the banking sector remains significantly capitalised?
WAINAINA: When you look at the overall figures concerning the growth of NPLs in Kenya over the last couple of years, it is not that dramatic. The reason that NPLs have grown over this time is mainly due to enhanced supervision of the banking sector as a whole. I think that this enhanced supervision – whether through stricter auditing or regulations – can be very good for the banking sector as a whole. It is better to have a banking industry that is more – rather than less – conservative. I do not see significant weakness in the market due to NPLs.
AWORI: One of the things that the CBK is doing is supervising banks in a much more rigorous way, which is a very good thing for the market. Credit growth has been expanding by leaps and bounds over the last five years and over time there will be a natural build up of NPLs. The banking sector could not have been growing upwards of 20% for the last three to four years and not have had a build up of NPLs. NPL accumulation is simply an inevitable outcome of fast loan growth. The second issue is how to categorise NPLs and how to identify when a loan is in distress. In this case, there are varying levels of prudence that banks apply. I think that one of the significant impacts on the industry will be the IFRS9 rules which will come into effect in 2018. Banks will very quickly have to decide how to comply with these new guidelines and how much capital they will need to continue to operate effectively.
MANJANG: Within the industry overall, the levels of NPLs are increasing. As industry regulations are tightened, we expect to see the amount of NPLs continue to rise into 2017 or until we get to a point where the industry’s policies and practices are uniform across the board. In banks where NPLs are substantially high, capital-adequacy ratios will be significantly impaired, which means that those banks would have to raise capital.
To what degree is increased consolidation in the banking sector needed?
AWORI: With over 40 banks in the sector, we certainly have a lot of banks considering the size of the economy. I think that the laws of natural selection will apply here in terms of market players surviving in this competitive environment. Because of the new interest rate cap that was introduced, banks will soon have to decide whether or not they can operate in a profitable way and generate a return to their shareholders. If they are unable to make a return on equity that is greater than the cost of equity, investors might start turning to Treasury bills or government securities. This is especially true for foreign investors who have to factor in hard currency returns. Further consolidation in the banking sector remains a possibility. As seen previously, there will be a greater urgency for consolidation as banks begin to erode their capital base with losses. However, at the same time in regards to consolidation, one of the challenges will have to do with accurate pricing of banks during mergers and acquisitions, due to the new regulations in interest rate capping.
MANJANG: The central bank has stated that they do not have a standard policy to force consolidation within the industry. However, with the tightening of supervision, some banks might see the need or feel the pressure to consolidate. The proposal to raise capital requirements from KSH1bn ($9.8m) to KSH5bn ($48.8m) over the period of three to four years was initially shut down; however, there may be merit in taking a second look at this idea to make sure that banks entering the market are well capitalised. There are 44 banks operating across Kenya. If you compare that number to other countries on the continent with higher GDPs but with fewer banks – like Nigeria and South Africa – it raises the question whether Kenya really needs that many banks. I think it would be healthier overall for the banking sector to then have a fewer number of banks, but ones that are well-capitalised.
WAINAINA: The question is, will raising the capital requirements from KSH1bn ($9.8m) to KSH5bn ($48.8m) be of value to the banking sector? We need to consider what it will mean to Kenya’s overall economy to have fewer banks. Kenya does seem to have an excessive number of banks; however, historically, financial inclusion was very low so having this many banks was advantageous as it allowed for more customers to be served and increased the rate of financial inclusion in the economy. Not only that, competition drives innovation and keeps prices for financing and other products low. On the other hand, considering the size of Kenya’s economy, a large number of banks means smaller banks aren’t as able to compete for large projects. For example, with large-scale, public infrastructure works, banks need financial backing that can accommodate large-scale investments. Having a large number of small banks makes it difficult to accommodate the myriad financing challenges in the country. I do not think that there is a binary solution, especially considering that consolidation should happen at a rate in which banks can keep pace with the needs of the economy.
What steps can be taken to increase the banking penetration rate in Kenya?
MANJANG: The advent of mobile banking has led to historically greater access of banking services. The combination of telecoms with banking has really increased the level of penetration in the market and access to finance. Digital transformation is driving innovation in the banking sector – especially the retail banking space. While this is creating opportunities for banks to reduce costs and mitigate risks, it is also becoming easier to access customers. Digital technologies will continue to shape the future of banking by delivering easy, convenient banking through a myriad of channels. We also see the adoption of agency banking as being a critical factor.
WAINAINA: Ten years ago, before widespread mobile money solutions, 9.1% of the population had access to banking services, but approximately 27% had a mobile phone. Eight years later in 2014, those numbers changed dramatically to 62.5% and 83% respectively. This is a very significant increase. It was during that time M-PESA – the mobile phone-based money transfer, financing and microfinancing service – was launched. Over this time, Safaricom processed approximately KSH5trn ($48.8bn) per annum versus the overall bank transfers of KSH15trn ($146.4bn), showing that mobile money makes up approximately one third of banking sector activity. That means there are significant payment options available to the public outside of the traditional banking sector. More importantly, the growth of mobile money did not inhibit the growth of banks, if anything it complemented it. What we see is that by using both services together, we can increase overall banking transactions and increase overall inclusion.
AWORI: Ultimately Kenya’s banking penetration has risen rapidly over the last 10 years to just over 70%, and that number continues to grow. The confluence of banking and mobile money is definitely the way forward. Many people look at it being either in mobile money or banking, but the future is going to be more about mobile banking and app-based banking which uses data. The growth of smartphone technology combined with the drop in prices will naturally lead to everyone having a this technology and these same people wanting banking solutions on their phones. Similarly, I think that we will see mobile banking become operator agnostic; in other words mobile banking will not be tied to the operator or SIM card that you have. In addition, as other banking-related institutions – such as credit reference bureaus – become linked with mobile banking, we will continue to see upward growth in mobile banking products and mobile banking penetration rate. This will be, in part, due to banking products becoming customised to the individual consumer.
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