2017 set to be year of reckoning for an industry that has defied economic cycles for a decade

All eyes are on CBK Governor Patrick Njoroge's game plan in 2017 as sector yearns for stability, growth. GRAPHIC | BUSINESS DAILY
All eyes are on CBK Governor Patrick Njoroge's game plan in 2017 as sector yearns for stability, growth. GRAPHIC | BUSINESS DAILY 

Judging by developments in 2016, keen followers of the banking industry believe 2017 could be a year of reckoning being the first full year in which the lenders will contend with interest rate caps, low public confidence and a cyclical slowdown of the economy due to upcoming elections.

The pain is expected to be especially sharper because this is an industry that has enjoyed more than a decade of robust growth in profits and assets before it was hit by the shocker of interest rate caps.

Besides, 2016 is the year in which one more bank followed the two in the previous year down the path of collapse, bad loans spiked, scandalous transactions were laid bare and financial statements were queried denting public confidence in the industry.

Job cuts, salary freezes, consolidation and increased adoption of technology, especially mobile banking, are expected to dominate the industry’s agenda reversing the fortunes of a sector that has been a source of new jobs.

The collapse of Chase Bank in March, coming on the back of Imperial Bank and Dubai Bank closure, set the industry sliding on a slippery path that saw the public withdraw their funds from suspected weak banks in a rush resulting in a liquidity crisis.

Faced with low cash positions, most of the lenders cut back on lending. “The main thing was what happened to Chase Bank causing liquidity shortfalls across the industry which resulted to reduced lending,” said Francis Mwangi, head of research at Standard Investment Bank. He noted that this year’s challenges will carry on to the new year.

Lending to the productive private sector grew at the slowest pace recorded in a decade as banks struggled with low cash levels and investors shelved expansion plans in a harsh economy.

The industry faced the challenge of dealing with social media rumours on looming collapses which kept haunting small lenders.

Manipulated books

Disclosures that National Bank had manipulated its books to cover for insider lending — as was the case with Chase Bank and the immediate issuance of a circular by the central bank calling for auditing of all insider lending in the industry — further fuelled public mistrust of the sector.

“There was skewed distribution of liquidity because some banks had been profiled and so customers were panicking and stashing liquidity in some specific banks,” said Habil Olaka, the chief executive of Kenya Bankers Association. Businesses and households struggled to meet their loan obligations in a slow economy, resulting in bad debts piling up to a record Sh207 billion as at the end of September.

When Parliament in July passed a Bill proposing to cap interest rates the odds were already staked against the banking industry but its executives didn’t seem to notice the tide change.

Bankers had successfully fought off previous attempts to regulate loan prices, with economic experts and the executive in their corner.

President Uhuru Kenyatta’s decision to sign the Bill into law in August caught the bankers and market players by surprise, throwing them into a spin. Investors dumped the previously treasured banking stocks at the Nairobi Securities Exchange leading to huge price falls.

Eleven listed banks were valued at Sh496 billion in yesterday’s trading compared to Sh676 billion at the beginning of the year, being a Sh180 billion loss of shareholders’ wealth.

More than 10 lenders declared a profit drop in the nine months to September, indicating the tough times that have befallen the sector.

Profit drop

The decision by Fidelity Bank owners to sell it to Mauritian SBM Holdings at Sh1.3 billion, with no premium loaded to its net asset value, underlined investors’ negative outlook of the banking industry. More than 1,000 bankers have lost their jobs during the year, with more expected to feel the pinch in 2017 as banks adjust to the regulated environment.

“There will be continuation of the reorganisation of banks where institutions will be looking at their business models to ensure they are operating sustainably in the new environment,” said Mr Olaka.

Some of the lenders that have given indications to pending job losses include Consolidated Bank, Standard Chartered, Ecobank and National Bank which has reopened it early voluntary programme.

Banks that reduced their staff numbers during the year include Equity Bank, Co-op, NIC, sharia compliant First Community Bank, Family and Sidian Bank.

Increased uptake of mobile banking and automation of banking processes has been a key contributor to the job cuts with more banks expected to embrace technology solutions to protect their revenue margins.

Bad loans are expected to remain high as investor take a wait and see stance in an election year which has already started witnessing rising political temperatures.

Pressure will be on the monetary policy committee, which sets the Central Bank Rate (CBR) which is the benchmark for lending rates in the country, to lower credit prices to spur the economy.

Mr Olaka urged for coordination between the monetary and fiscal policy so as to ensure the cost of funds for banks are aligned.

A loose fiscal policy would result in a hike in Treasury bills and bonds pushing up the cost of funds for banks as investors opt for the risk free government securities denying banks cash to lend to the private sector.