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Number of strong banks falls by 50pc on tough CBK rules

The Treasury and the Central Bank say they have what it takes to stabilise the shilling. PHOTO | FILE
In a move underlining concerns over the health of the industry, the Central Bank of Kenya (CBK) has downgraded its rating of the banking sector to satisfactory from strong. PHOTO | FILE 

The number of strong commercial banks has fallen by half as the regulator adopted a stringent supervision stance following change of top management mid last year, the latest industry supervision report shows.

In a move underlining concerns over the health of the industry, the Central Bank of Kenya (CBK) has downgraded its rating of the banking sector to satisfactory from strong. “The institutions rated strong decreased from 22 in 2014 to 11 in 2015 due to the general drop in asset quality, earnings levels and liquidity positions of several banks,” reads part of CBK’s supervision report.

The 11 strong lenders have a market share of 35.5 per cent which is lower than the market share of large banks that stands at 58.2 per cent, signalling that some of the top seven lenders were not viewed as strong.

Strong is the highest recognition of an institution’s health, followed by satisfactory then fair, marginal and the poorest being unsatisfactory.

Two banks, with a market share of 0.79 per cent, were said to have marginally met the compliance levels. This is the first time in seven years that a bank is rated as being marginally satisfactory.

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The report did not disclose which banks fall under each category (of health), making it difficult to know how the regulator has been rating Dubai Bank, Imperial and Chase Bank in the two years before they collapsed.

Dubai Bank

There were no banks ranked in the low levels of “unsatisfactory” and “marginal” in 2014, indicating Dubai Bank, whose frailties were well documented in the press, was viewed as fair by the previous regulatory regime.

Appointment of Patrick Njoroge as the CBK governor mid last year resulted in tightening of compliance levels in the sector with three banks put under statutory management in their first nine months in charge.

Dr Njoroge told MPs that his predecessor, Njuguna Ndung’u, preferred exercising forbearance while dealing with a non-compliant bank.
Prof Ndung’u held the position that closure of such lenders would erode confidence in the sector.

Dr Njoroge differed with this position stating it gave insiders an advantage as they were in a position to exit when they realised a bank faced imminent closure.

The governor has proposed a change in the Banking Act to allow CBK to name non-compliant banks in order for the public to know the kind of exposure they face as they visited different lenders.

There have been concerns that such disclosures may result in a run in weak banks pushing them over the cliff.

Notably most banks do not display their annual report and financial statements on their websites to allow potential customer to evaluate their strength but they are free to collect deposits from the public.

The CBK noted four banks were last year in violation of different sections of the Act and prudential guidelines.
Two of the lenders had insufficient liquidity levels, being below the statutory 20 per cent. Liquidity is a key requirement for a bank to remain afloat.

The Business Daily identified one of the banks as Credit Bank, whose liquidity stood at 16.5 per cent as at the end of last year. An investment group, Fountain Enterprise Programme, had declared intentions to acquire a controlling stake of 75 per cent, by injecting Sh4 billion into the bank.
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