It seems the current economic environment will continue to provide several moments of epiphany to banks. And it’s everywhere, not just Kenya. From elevations in asset non-perfomance, funding challenges to tougher regulations.
In last week’s installment, I told you about the perpetually deteriorating business fundamentals in South Sudan—even calling on local banks to significantly scale down operations or reconsider long term presence.
This week, let’s shift the focus to Uganda where some interesting developments have been brewing. It is emerging banks for a while now, have been seriously considering forming own bad bank company to help smoothen rising loan delinquencies.
Essentially, a bad bank is a company/vehicle formed to buy non-performing loans (NPLs) from banks, or other regulated lending institutions, in exchange for cash or any other ‘I owe you” instrument.
Usually, the vehicle is unleashed when delinquencies threaten stability of a financial system and form part of regulatory intervention mechanisms to avert systemic risks.
Over the last decade, two such vehicles were crafted in Africa; in Nigeria during the 2008/9 banking crisis and most recently in Zimbabwe when excruciatingly high NPLs threatened to bring down the sector.
This latest consideration in Uganda shows that another cycle may have kicked off. Indeed, delinquency is now fast racing towards hair-raising levels in the East Africa Community (EAC).
In Kenya, the ratio of gross NPLs to gross loans, NPL ratio, is fast approaching the double-digit territory.
In Tanzania, the ratio hit 11 per cent in the first three months of 2017. In fact, in Dar es Salaam, the volume of delinquent loans among the top five banks was equivalent to more than a third of their shareholder capital.
That’s pretty high and some of them may require recapitalisation. In Rwanda, the ratio escalated at the close of March 2017 by 200 basis points year-on-year to eight per cent, and counting.
In Uganda, the subject of this installment, NPL ratio doubled from five per cent at the close of 2015 to 10 per cent by the close of 2016-and counting of course.
NPLs especially if elevated, present two conceptual problems for bank: first is funding, since those dead assets have to be funded anyway. Second is debt collection logistics.
In the case of secured lending it will involve liquidating collateral, fraught with legal nightmares. In the case of unsecured lending, it will probably entail suing a defaulter or even foreclosing households, both nasty and costly.
The whole idea of the vehicle is simple: hive off these headaches from the bank and let the bank concentrate on its core business.
For Uganda, if the vehicle comes to fruition, this will probably be the first time in the region that this sort of intervention is being originated by commercial banks themselves, which could present a learning point for their Kenyan counterparts. However, its fruition could be fraught with a number of sequencing risks.
First, funding. Usually it’s much easier in the case of regulatory interventions—because taxpayers fund the vehicle. Second, the vehicle may not enjoy the luxury of State resources often needed in coercing serial defaulters.
Finally, the vehicle will require regulatory oversight, just in case it turns into a dumping ground. And such regulations will need to be in place before operationalisation. Essentially, this looks like a long shot to me.