The Kenya Bankers Association(KBA) has indicated that a financial crisis in Kenya is unlikely due to the high levels of liquidity within the banking system.
“We anticipate the banking industry will remain sufficiently capitalized even under extreme stress. With the high capitalization levels, banks are in a strong position to support business navigate the adversities associated with COVID-19 without risking systemic stability. That support is already evident,” said Dr Habil Olaka, Chief Executive, Kenya Bankers Association.
Earlier in the year, banks had hinged growth projections on strong business prospects based on anticipation that Kenya’s economic growth would remain strong. Repeal of the interest rate caps law was also a boon for the banking sector as it prepared to unleash lending to households and small business.
But with the outbreak of Coronavirus disease, banks remain cautious and have been busy restructuring their portfolios to safeguard the quality of the loan book.
“The sectors taking the biggest share of the exposure are likely to be trade, household credit, manufacturing, transport and communication, tourism and construction,” said KBA Research and Policy Director Mr Jared Osoro.
In a survey titled Spillovers and Feedback Loops: The Banking Industry’s response to the effects of COVID-19 pandemic 65% of banks interviewed expect non performing loans (NPLs) to increase to 14% from the current NPLs to Gross loans of 12.4%.
Data from Central Bank of Kenya (CBK) shows that over KSh 17.6 billion worth of loans have already been restructured as banks renegotiate with distressed individual and corporate borrowers.
While KBA expects business slowdown as a result of COVID-19, the professional lobby insists that the banking industry is still highly liquid and is unlikely to suffer any financial meltdown as a result of this global pandemic.
Dr. Habil Olaka noted that in light of the anticipated impact of the health crisis, KBA in partnership with the CBK has moved to provide cushion to financially distressed bank borrowers. Dr. Olaka observed that the reduction of the Cash Reserve Ratio (CRR) has substantially supported the loan restructuring process.
This survey shows that majority of loan applicants will seek restructuring of tenor and interest rates relief, with an appropriate monetary policy stimulus, will lead to lower interest rates. The popular tenor extension is anticipated to be one year in view of the elevated risk profile of customers arising from the shocks associated with the pandemic.