One of the World’s top three most recognized statistical rating organizations, Fitch Ratings has said that the current crisis among Kenya’s small and medium-sized banks could erode confidence in the country’s highly fragmented banking sector, which is one of the oldest and most developed in sub-Saharan Africa, and potentially scare away foreign investment’
The credit rating agency argues that Lack of transparency among the smaller banks is a key risk to the banking system hence the recent troubles that have led to deposit runs, forcing the Central Bank of Kenya to support and a tighten the interbank market, all typical signs of banking system stress. More positively, the leading, systemic Kenyan banks have healthier financial metrics despite the weaker operating environment.
In July 2015, Fitch Ratings revised the Outlook on Kenya’s ‘B+’ rating to Negative to reflect, among other things, a deterioration in the sovereign’s public finances, poor revenue performance, increased infrastructure spending and persistently high current expenditure.
“A fragmented banking sector increases the burden on supervisors and makes it difficult for smaller banks to achieve economies of scale to help sustain profitability. Forty-two commercial banks operate in Kenya, a country of 44 million people, compared with Nigeria’s 22 for around 180 million inhabitants and South Africa’s 15 for 55 million. The top five banks hold about 50% of the market. Foreign-owned banks are prominent among the largest Kenyan institutions.” says Fitch Ratings in a statement sent to newsrooms.
“But the quality of prudential oversight in Kenya compares favourably with sub-Saharan peers. We believe the central bank does not want to force through mergers and acquisitions, but to allow market forces to lead to consolidation. In 2016 we expect the country’s largest banks to remain profitable despite rising loan impairment charges, more modest loan growth and high interest rates. Deposit growth remains strong, providing good balance-sheet liquidity for the top banks.”
Fitch also says its impressed with CBK’s efforts to strengthen prudential oversight in the banking sector which include restrictions on new licences, steeper minimum capital requirements and efforts to improve corporate governance. Related-party lending appears to lie at the heart of the recent bank failures and requirements for greater independent board representation have been introduced.