Banks left with idle capital after fund raising campaigns

Kenyan banks are now holding excessive capital that requires aggressive marketing of loans after the frenetic funds-raising campaign last year.

Data from the Central Bank of Kenya shows lenders have core capital (shareholders’ funds) equivalent to 16.7 per cent of their loan book against the statutory minimum of 10.5 per cent while their total capital (all types of funding) ratio to the loan book was at 20 per cent against the required 14.5 per cent.

“These ratios are significantly higher than the minimum core and total capital ratios,” said outgoing Central Bank governor Njuguna Ndung’u.

The headroom against regulatory requirement gives the lenders muscle to increase their lending.

“It doesn’t mean they are insufficiently utilising their capital, but they are appropriately prepared to take on additional risk weighted assets,” said Jared Osoro, director of research and policy at Kenya Bankers Association.

Several banks have launched aggressive marketing campaigns offering favourable interest rates on loans.

On Friday, Family Bank said it would be offering salary backed loans at 15 per cent with a repayment period of up to six years in an offer valid till end of April. Barclays Bank is also running a mortgage loan offer at a rate of 11.9 per cent.

The Central Bank said banks grew their loan books by 21.8 per cent in January compared to the same period last year. This was faster than the 21.4 per cent expansion targeted by regulator and puts the industry’s total lending to private sector at Sh2 trillion.

READ: Barclays cuts loan cost after CBK base rate reduction

Credit to private sector grew by 22.8 per cent last year which is the fastest in the past four years and is expected to maintain the pace with businesses optimistic of economic growth this year.

“Monetary Policy Committee survey showed private sector was optimistic that the business environment would improve in 2015,” said CBK.

The government is also betting on increased lending to the private sector to support its ambitions of a double-digit growth in the economy. Last week, Bloomberg polled Kenya to be the third fastest growing economy in the world this year. China and Philippines were ranked ahead of Kenya.

Banks were involved in capital raising campaigns at the end of last year that has seen the core capital ratio to loan book rise from 15.1 per cent in September to the current 16.7 per cent.

Last December more than 11 banks were involved in capital raising targeting more than Sh30 billion. CBK increased the capital ratio requirements of the banks in January, mandating them to hold a capital buffer of 2.5 per cent.

The Central Bank said the capital buffer has also strengthened the banks’ ability to issue additional loans without fear of being crippled by losses from bad loans that may arise.

“The buffers have enabled the banks to absorb additional loan loss provisions required for the slight increase in non-performing loans registered in 2014,” said CBK in a statement issued two weeks ago.

International financial institutions such as the IMF and credit rating agency Moody’s had raised concern over the country’s banking sector due to rising bad loans.