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Corporate

Jump in bad loans provision cuts Barclays profit 6pc

Barclays Bank branch on Muindi Mbingu Street in Nairobi. PHOTO | FILE
A Barclays Bank branch on Muindi Mbingu Street in Nairobi. PHOTO | FILE 

A triple jump in loan loss provisions has reduced Barclays Bank of Kenya’s net earnings by 6 per cent in the third quarter ending September 2016.

In audited results published in the local dailies on Wednesday, the bank’s loan loss provisions went up more than three times to Sh3.1 billion from Sh986 million last year.

A further six-fold jump in directors’ emoluments to Sh96.8 million contributed in reducing the bank’s net earnings to Sh6.06 billion from last year’s Sh6.4 billion.

The drop in profits was reflected in the earnings per share which experienced a marginal fall to Sh1.12 from Sh1.18 in the same period last year.

Banks were caught between a rock and a hard place after the regulator, the Central Bank of Kenya, pushed for adjusted provisions for bad loans after three banks went under, while the Kenya Revenue Authority warned against using the same to cut down profits to reduce tax burden.

In May, CBK warned lenders of penalties for understating their bad loans to book higher profits, as non-performing bank loans in the sector rose to 8.2 per cent up from 4.6 per cent in June 2015

Compliance with CBK guidelines

The spike was attributed to compliance with CBK guidelines, which was previously ignored by most lenders in a bid to remain profitable.

In the same period, KRA Commissioner-General John Njiraini warned banks whose lending did not comply with the Central Bank’s prudential guidelines that they would not qualify for deduction for tax purposes.

“Banks shall not be permitted to enjoy tax deductions for loans arising from irregular insider lending or loans for which inadequate collateral was secured.

“The KRA decision is informed by both professional considerations and the need to protect public funds from inappropriate decisions made by bank management in contravention of prudent banking practices.

“Demands have already been issued in respect of non -qualifying deductions and more work is in progress,” Mr Njiraini said.

Banks that accounted for close to 40 per cent of income tax collections remitted Sh900 million less in April 2016 compared to the Sh12.3 billion they remitted to the tax man in the same month last year.

The drop was attributed to loan-loss provisioning, a move the tax man had disputed earlier.

Underreport bad loans

When banks underreport bad loans, they get a leeway to lower loan-loss provisions and push up profitability while so much provisions lower profitability and consequently, income tax.

Barclays Africa Group recently acquired approximately 63.3 per cent stake in First Assurance Company Limited for Sh2.8 billion, including a capital injection of Sh722 million to boost her bancassurance business.

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