The number of commercial banks in poor financial health in Kenya grew to 13 last year after more lenders failed to maintain the required capital levels that act as guardrails against a bank run, underlining the task ahead for the new Central Bank boss.
The increase translates to a 44 percent rise compared to the nine lenders found to be in breach of critical supervisory and regulatory requirements in 2021, a new report by the Central Bank of Kenya (CBK) shows.
The CBK, which did not name the affected banks, said the financial breaches it found included over-lending to a single borrower, excessive insider lending, over-lending to the real estate sector, too much foreign exchange exposure and the failure to keep aside adequate capital for high-risk loans.
“During the year ended December 31, 2022, thirteen commercial banks were in violation of the Banking Act and CBK Prudential Guidelines compared to nine commercial banks in the previous year 2021,” said CBK in the Banking Supervision Report 2022.
The data also gives perspective on how the liquidity crunch, aggravated by a dysfunctional forex interbank market, pushed core capital levels for some of the banks to drop, leading to several breaches in capital and liquidity ratios.
Most of the breaches were on capital adequacy requirements, which are ratios that the CBK, the financial sector regulator, uses to evaluate the financial health of a commercial bank.
For example, 10 banks breached the requirement that they should not lend more than 25 percent of their core capital to a single borrower.
Known as the single obligor limit, this lending limit is aimed at minimising the bank’s exposure to one borrower in case the borrower defaults on the debt.
“Most of the violations were in respect to a breach of single obligor limit mainly due to decline in core capital in some banks that have continued to report losses,” said the CBK.
In 2021, the CBK report shows that only eight banks were in breach of this limit.
The CBK data also shows that eight banks made a loss before tax last year, an increase from five in 2021.
In the review period, eight banks were found to be in breach of the legal requirement to maintain the core capital of at least eight percent of the total deposits. This was an increase from three in 2021.
Five banks, up from three in 2021, were found guilty of lending more than 20 percent of their core capital to one of their employees.
“What is happening globally is trickling into our market. And this has to do with, for instance, the mark-to-market losses. Right now if you can get internal loans at five percent and externally they are giving at 24 percent, it is more lucrative to get these loans. So you will find insider loans are growing beyond limits,” said an analyst who refused to go on record.
During the review period, lending to employees by three banks exceeded the statutory limit of 100 percent of the core capital. This was an increase from two in 2021.
The core capital for the two banks fell below the minimum requirement of Sh1 billion. This was a drop from three in 2021.
The continued worsening of the capital and liquidity ratios, some analysts have argued, signals that the CBK is sleeping on the job.
“For instance, the CBK is giving banks the ability to do risk-based lending but then they are not giving them caps. So, it means banks are free to do whatever they want,” said an analyst who declined to be named. The CBK has been going hard on banking sector analysts who comment on the happenings of the industry.
The Banking Supervision Report 2022 did not mention any of the banks that were in breach of the capital adequacy ratios.
And in a period when traders decried dollar shortage, three were found to have failed to maintain foreign exchange exposure at less than 10 percent of their core capital.
However, last year, First Community Bank, which has since been acquired by the Somalia-based Premier Bank, disclosed a shortfall of more than Sh1 billion in core capital, or shareholder funds.
Teachers-owned Spire Bank, which has since been acquired by Equity Bank, was also in breach of most of the capital and liquidity ratios with the lender sliding into a loss of Sh10 billion.
A few banks were also in violation of the requirement to have adequate loans and other assets weighted according to risk to determine the minimum capital they can hold, or what is known as risk-weighted assets.
With an unsecured loan, for example, a bank needs to have more of risk-weighted assets compared to a secured asset.
Five banks did not meet the total capital to total risk-weighted assets ratio of 14.5 percent.
Another bank failed to meet the minimum capital adequacy ratio of 10.5 percent for core capital to total risk-weighted assets in the review period.
Three banks failed to meet the minimum liquidity ratio of 20 percent.
Lenders were also in breach of investing more in real estate and land and buildings, beyond the statutory limits.
A tight liquidity saw a lot of financial institutions increase their borrowing from the lender of last resort with CBK’s advances to commercial banks rising from Sh71.8 billion in June last year to a record high of Sh111.7 billion by the end of December.