High-level profitability has won Kenyan banks top ranking in this year’s list of lenders with the highest rate of return to investors globally.
The Financial Times’ (FT) latest listing of the world’s Top 1,000 banks shows that Equity Bank is Africa’s lender with the highest return on assets — an indicator of profitability that is determined by dividing the net income by total average assets — while Kenya Commercial Bank (KCB) is third.
“For the second year running, Kenya’s Equity Bank made the highest return on assets in the continent, generating a rate of 6.84 per cent,” the report says, adding that its local rival, KCB, with a rate of return of 5.14 per cent, is Africa’s third-most profitable lender.
KCB and Equity are the only Kenyan lenders who made it to the listing of the world’s largest banks that is published by FT’s the Banker magazine. Cooperative Bank, which made it to the list last year, missed this year’s ranking.
The Banker report ranks the world’s top lenders based on a number of parameters, including deployment of capital, use of shareholder funds and profitability. The report says that KCB, Kenya’s largest bank by assets, is the world’s 846th largest while Equity Bank is 990th having climbed nine places from last year’s position 999.
The global honours have come in the middle of an intense debate at home on the interest rates charged by Kenyan banks and its impact on the economy.
Kenyan banks have been under intense public pressure to reduce the lending rates and have only recently responded to that pressure with the launch of a new interest rates computation mechanism, the Kenya Banks’ Reference Rate (KBRR), and the use of annual percentage rates (APR).
Loans constitute more than 57 per cent of the assets held by commercial banks, making interest rates charged critical to the overall performance.
Though the banks have argued that the high cost of credit in Kenya is the product of the high-level risk and inefficiencies in the market, the crusade against banks has raged on led by high-profile personalities like Deputy President William Ruto. Mr Ruto early this year constituted a committee to look into ways of increasing the uptake of credit and the team has since deliberated on the matter and recommended a reduction in interest rates.
“The comparison (in return on assets and on equity) implies that there is room for Kenyan banks to lower their charges as a way of sharing efficiencies resulting from the various reforms and innovations,” the committee said in a report.
The 2014 Banker report says Equity Bank had the highest return on capital in Africa at 54.9 per cent while KCB was fifth with a rate of 39.5 per cent.
Central Bank of Kenya (CBK) data shows that Kenyan lenders had an average return on assets of 4.7 per cent last year — higher than the best performing lenders in Asia, Middle East, Central and South America.
Kenyan lenders have attributed the high rates of return to their appetite for high-level risk in the market.
“Risk-taking appetite for the other banks will be lower than that of Kenya’s so for the higher risk appetite Kenyan banks get a comparatively better return,” said Kenya Bankers Association (KBA) chief executive Habil Olaka.
More recently, agency and mobile banking has helped Kenyan lenders improve their efficiency, raising staffing ratio to one officer for 640 customers.
Critics of the interest rate regime, led by Mr Ruto, however, continue to point at the wide spreads — the margin between what the banks pay their customers for deposits and what they charge borrowers — as the driver of high cost of credit.
Kenyan banks charge some of the highest interest margins in Africa.
The country’s average interest spread stood at 8.77 per cent in May, adding to an average lending rate of 15.3 per cent.
A survey by the World Bank and the CBK found that the profit component in the spread has recently increased to 55 per cent even as the overheads component dropped to 34 per cent.
This means that more than half of the banks’ mark-up is pocketed by the owners. The high interest rates have forced many ordinary Kenyans to shun borrowing from banks, leaving the entire industry with 3.5 million loan accounts compared to 20 million deposit accounts. Of the 3.5 million loan accounts, 2.5 million are held by individuals, meaning that only one million loan accounts are held by enterprises.
The individual loans are largely salary-backed having shot up with the introduction of unsecured loans. This means that the costs incurred by the lenders in generating and managing loans are spread over a low base of borrowers.
Past efforts to have banks lower interest spreads have not been successful. The most recent is the introduction of a standard base rate, the KBRR. The rate will be set by the CBK every six months and individual lenders allowed to load a margin on the base rate. The CBK has no control on the margin that each bank will load on the base rate and will have to rely on moral persuasion to keep the rates close to the KBRR.
Previous attempts were largely from Parliament which sought to control interest rates through the Central Bank of Kenya (Amendment) Bill 2000 (better known as the Donde Bill) and then the interest spreads through a Bill sponsored by Gem MP Jakoyo Midiwo in 2012. None of the Bills was ever enacted into law.
The high returns have seen investors flock to bank counters at the Nairobi Securities Exchange (NSE) while private equity firms have been buying into small lenders.
There are 31 banks from nine African countries in the Banker’s 2014 Top 1000 list. West African lenders with operations in Kenya, including Ecobank ranked 396, Guaranty Trust Bank (415) and UBA at 539 are on the list.
KCB and Equity have subsidiaries in Uganda, Tanzania, Rwanda, South Sudan and Burundi for KCB.