NAIROBI, Kenya, Apr 6 – Only seven banks out of 42 banks hold 80 percent of Kenya’s population cash raising concerns of liquidity among Kenyan Banks.
This is according Central Bank of Kenya Governor Patrick Njoroge who says other banks are starved of liquidity.
Njoroge says liquidity management issues have not started in the recent past, but has been going on for a long time.
“The problem did not start with Imperial Bank, it predates all these issues in the sector, if you look at the interbank market for instance some banks will trade at reasonably favourable rates, but when they lend to another smaller bank it’s like four times the rates, there is this sort of segmentation in the market. So you have some banks are playing in the wading pool while others are in the swimming pool,” he illustrated.
He says liquidity needs to move much more smoothly to all the banks.
“You cannot tell me even with their risk profile an institution is four times the price to another institution, there is something wrong with that model,” he said.
This comes even as banks struggle to make profit with increase in nonperforming loans becoming prevalent in the sector.
Treasury Cabinet Secretary Henry Rotich had earlier proposed that banks core capital be raised from Sh1 billion to Sh5 billion within the next three years but Governor Njoroge is still opposed to the move.
“It’s not that we should have a minimum capital of Sh1 billion or Sh5 billion or Sh10 billion those are all the wrong questions, the question is, are the institution resilient? Can they sustain shocks? – are they efficient,” he stated.
He said banks should diversify their investments and lending portfolio so that they have more options and are less likely to be destabilized by one shock in a particular sector.
“This is the time that banks need to think through their own business, it’s a transition point where they need to strengthen their business model and also consolidate with other institutions, find strategic investors that will make the bank more resilient,” he added.
Kenya has a total of 42 commercial banks, 1 mortgage finance company, 12 microfinance banks, 8 representative offices of foreign banks, 86 foreign exchange bureaus, 14 money remittance providers and 3 credit reference bureaus.
Cytonn Investments maintain that Kenya is over-banked with a relatively high ratio of banks to total population, with 42 commercial banks serving of 44 million people, compared to Nigeria’s 22 for 180 million and South Africa’s 19 for 55 million.
This has led to the consolidation of banks through acquisitions such as Giro bank by I&M Holdings.
According to the Cytonn Investment Banking sector 2015 report, Kenya banks recorded much lower earnings growth, driven by the challenging economic environment in 2015, with the high interest rates which reduced credit uptake especially by the private sector while at the same time having a profound effect on deposit mobilizations as most depositors greatly preferred to invest in government securities at the time
The report indicate that the listed banking sector’s aggregate gross loans and advances grew by 17 percent to Sh1.8 trillion in December 2015 from Sh1.5 trillion in 2014 while deposits grew 14.5 percent to Sh2 trillion in December 2015 from Sh1.8 trillion in 2014.
Total assets grew 14.9 percent in December 2015 to Sh2.8 trillion, from Sh2.4 trillion in 2014.
“Since 2010 the aggregate of listed banks profit after tax has grown at a Compound Annual Growth Rate (CAGR) of 13.5 percent. Deposits have grown at a CAGR of 13.5 percent, with loans and advances having outpaced deposit growth at a CAGR of 19.4 percent,” the report states.
As a result of the high interest rate environment in 2015 and with increased supervision of banks as a following the exposure to Imperial Bank and Dubai Bank, banks have built up capital and other provisionary requirements with the most notable being the increase in the listed banks’ loan loss provisions by 85.4 percent .
This has led to an increase in the cost to income ratios of banks. The non-performing loans for the year also rose as a result of the expensive costs of financing loans.
“The closure of Imperial Bank as a result of “unsafe and unsound practices”, combined with the recent suspension of the CEO and senior executives of National Bank, pending an internal audit, has raised questions over the state of corporate governance in the Kenyan banking sector, as well as the ability of regulatory authorities such as CBK and CMA to effectively monitor banking practices,” the report indicates.