Kenya’s banking industry has sufficient capital buffers to shield itself from COVID-19 pandemic shocks. This is despite potential effects of the pandemic on the industry’s asset quality and overall performance.
According to The Kenya Financial Stability Report, Issue No 11, published by financial regulators CBK, CMA, IRA and SASRA, this positive outlook will, however, depend on the pandemic’s intensity and duration- which remains uncertain.
The Banking industry has set in motion several mitigation measures to cushion its balance sheet and profitability from the pandemic’s effects on borrowers.
These include a moratorium on financially distressed customers, whose incomes have been hit by the pandemic, as well as waivers on transaction fees between bank accounts and mobile wallets.
All lenders adhere to the Guidance Note on COVID-19 Pandemic Planning, issued in March 2020, to prepare banks to deal with the crisis and mitigation measures to be taken to ease pressure on borrowers.
As of June 2020, the banking industry comprised 38 commercial banks, 1 mortgage finance company, 14 microfinance lenders, 9 representative offices of foreign banks, 68 foreign exchange bureaus, 19 money remittance providers, and 3 credit reference bureaus.
Figures from this Financial Stability Report show that the banking industry’s total net assets amounted to KSh 5,207.82 billion in June 2020, of which about 53% were in loans and advances and 13.6% in government securities.
Customer deposits were KSh 3,903.6 billion in June 2020. This increase in deposits is attributed to more digital finance usage, including mobile money, agency banking, and demonetization of KSh 1,000 notes.
The resilience of the industry is also reflected in the high capital levels in relation to assets. As of June of 2020, the Core Capital to Total Risk-Weighted Assets (TRWA) and Total Capital to TRWA ratios was 16.4% and 18.5%, above the minimum regulatory requirements of 10.5% and 14.5%, respectively.
The portion of Gross NPLs to gross loans deteriorated to 13.1% in June 2020 from 12.0% in 2019.
This is a result of a hit on household incomes and shut down by firms as well as layoffs due to disruptions in supply chains, restrictions of movements, and lockdowns.
The gross NPLs increased by 14.6% in the first half of 2020 to KSh 381.98 billion in June 2020, indicating elevated credit risk.
Banks in the middle tier group are the main drivers of high Gross NPLs ratio from June 2019 compared to banks in small and large groups.
Liquidity conditions and distribution are vital to the banking industry stability, signifying the bank’s ability to finance its assets, and meet customer demands.
A liquidity problem in one bank can disrupt liquidity distribution in the entire banking industry due to the interconnected operations.
The report warns that a liquidity problem may also metamorphose into a solvency problem for a bank if not handled well.
The banking industry has enjoyed ample liquidity overtime, averaging way above the minimum regulatory requirement of 20 percent.
However, if long term government bonds are excluded from liquid assets, the liquidity ratio shrinks to 26.5% in December 2019 and 27.1% in June 2020.
Therefore, government securities are a significant component of banks’ liquidity and therefore, a change in their treatment, in computing liquidity ratios, will significantly affect banks’ liquidity buffers.
The report says an increase in bad debts charge and a decline in fees due to waiving of charges on bank- mobile money transactions reduced gross earnings for banks, which declined by 30% in the first half of 2020.
As shown by the Q3 2020 earnings, this decline in profitability has reduced reserves to build capital and liquidity buffers as well as viability of banks.
The Financial Stability Report is published once a year and contains the Regulators’ assessment of the financial system stability in compliance with the Central Bank of Kenya Act, Section 4(2) and the Financial Sector Regulators Memorandum of Understanding (MOU).
The MOU establishes a Forum comprising of the Capital Markets Authority (CMA), Central Bank of Kenya (CBK), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA), and Sacco Societies Regulatory Authority (SASRA).
The National Treasury and Planning, Ministry of Trade, Industry and Cooperatives, and the Kenya Deposit Insurance Corporation (KDIC) have observer or associate membership status.