Many years ago, I was invited by a friend to have dinner at her other friend’s house. We sat around the table, acquainting ourselves with each other while breaking bread and drinking wine as civilised folks do. My friend casually mentioned that I worked at a certain bank (hereinafter referred to as Bank X) and the host stopped mid-pour, the bottle of wine still in the air hovering precariously over an unfilled glass. “I hate Bank X, I hate them, I hate them,” she shrilled, getting more agitated with each virulent proclamation. To be honest, I wasn’t in the least bit interested why she hated Bank X as, in my seasoned experience, this was a fairly common reaction.
I just wanted to tuck into the delicious food that was cooling down fast and rejoin the beguiling conversation I had been having with the person seated next to me. I had come to relax on a Friday evening, not to fight a war that I was never going to win armed with nothing but my disarming smile and a dinner fork. But my host railed on and on about her unsolicited Bank X experience until one of the other guests reminded her that perhaps this was not the place and time to get upset and maybe she should just kick it down a notch.
A decade later, Jude Njomo, the member of parliament from Kiambu who sponsored the interest rate capping law in 2016, shot to fame as the people’s saviour from what was perceived as a wicked banking industry. Following the resultant credit shrinkage from the banks, who were now forced to provide the same interest rate to borrowers regardless of their risk rating, he was quoted by the Sunday Nation on March 4th 2018 as saying “The credit squeeze to SMEs is a deliberate effort by commercial banks to sabotage the economy so that the government may influence Parliament to remove the interest rate caps.”
I often opined on this column that the same people who regarded banks as nefarious in their reluctance to give loans were the same ones who wouldn’t loan their own shillings to a wayward neighbour that needed working capital to run his kiosk. I further opined that the very money people were lusting for to be given at low interest rates for loans was their very own money that they had deposited in the banking industry. The oxymoronic nature of that fact was lost to quite a number sadly.
But that’s neither here nor there. In the last two months, the same banking industry has come to the rescue in the tune of hundreds of billions of loans that have had to be restructured due to the economic downturn that has affected millions of borrowers. From the individual employee whose salary has been cut or who has been made redundant, to the hotels and travel agencies that have had to close their doors as business has completely dried up.
Hundreds of thousands of individuals and businesses have applied to have the terms of their loans extended and monthly payments reduced so as to fit within the shoestring budget of a rapidly diminished cash flow projection. The banks have finally become our benefactors and our saviors. Who would have ever thought they would see the day?
The greater concern is whether the banking industry has the requisite bench strength to withstand what is sure to come. Higher provisioning for bad loans, made worse by the recently applied and much stricter IFRS accounting standards are sure to make a dent on profitability and put a strain on retained earnings and erode capital somewhat. Stress on banking liquidity ratios will also take a toll. The ultimate loser will be the shareholders, some of whom were already grumbling on social media last week when a number of banking institutions publicly declared that they would not be paying dividends for the 2019 financial year, dividends that the grumbling shareholders had already budgeted for in their own personal cash flow projections.
This step by the banks is a defensive strategy to batten down the hatches and conserve cash for the balance sheet onslaught that is sure to come from the loan restructurings.
The banking industry is often the bellwether for the economic health of a country. The second quarter ending June 2020 results, which we won’t see published until late August will be the first indication of how much blood is in the water. We will then know that reopening most sectors of the economy is not a nice to have, it is a critical must have. That should surely make for interesting dinner conversation over the next few months.