NAIROBI, Kenya, Aug 25 – The banking industry is poised to withstand market shocks induced by the Coronavirus disease (COVID-19) pandemic even as the economy grapples with a market environment characterized by constrained supply and demand.
According to the Kenya Bankers Association’s (KBA) State of the Banking Industry (SBI) Report 2020, banks are sufficiently capitalized to weather shocks arising from the prevailing economic slowdown without triggering instability in the financial system.
The newly released KBA report, whose findings are based on a comprehensive assessment of the banking industry’s performance over the past 16 years with a focus on the year ending 2019, further indicates that the banking system’s assets continued to record a modest growth, supported by an increase in private sector credit growth.
“The implication of the capital sufficiency with adequate buffers that carried over from 2019 into 2020 means that the banking industry, which demonstrably dominates the Kenyan financial system, has remained a key line of defense in the economy when it comes to responding to the current economic slowdown,’’ said KBA Chief Executive Officer Dr. Habil Olaka, adding that the industry’s heavy investment on digital infrastructure in recent years is one of the key factors that enabled banks to quickly switch when faced by the COVID-19 disruption to a digital-first banking model for both retail and commercial clients.
“Banks have remained open and continue to serve, as such, business continuity has been assured,” he said.
“The banking industry has walked step by step with clients, restructuring in excess of Sh840 billion (up from Sh360 billion in June), which is a remarkable demonstration of the industry’s ability to anchor the economy over the short to medium term.”
According to the report, as at the end of 2019, the industry’s total assets stood at Sh. 4.8 trillion out of which loans and advances accounted for Sh. 2.7 trillion.
Although the industry’s assets continued to increase, the expansion was slow (9.2 percent), partly on account of the persistent rise in non-performing loans (NPLs).
“Non-performing loans remain elevated at double digits as a share of gross loans,’’ the report indicates.
NPLs as a proportion of gross loans have been growing over the past four years, recording 9.4 percent in 2016 and crossing the double-digit mark in 2017 at 12.3 percent and increasing marginally to 12.7 percent and 12.6 percent at the end of 2018 and 2019, respectively.
Currently, NPLs stand at approximately 13 percent compared to the 4.4 percent to 8 percent range that was witnessed during the 2009 to 2013 period.
The increase in gross non-performing loans over the years is mainly attributable to challenges in the business environment that led to cash flow constraints for borrowers.
The persistent drought and inclement weather experienced over the reporting period further affected key sectors, including agriculture and local manufacturing.
Despite the portfolio quality trend, the State of the Banking Industry’s 2020 outlook suggests that the industry is well-positioned with significant opportunities for banks to improve on efficiency.