Companies

Kingdom taps Sh20bn CBK funds for lending

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Kingdom Bank. FILE PHOTO | NMG

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Summary

  • Kingdom Bank is applying part of the Sh20.9 billion it received from CBK to give loans, a strategy that seeks to enhance returns from the cash on which it is not incurring interest expenses.
  • Most bank loans denominated in Kenya shillings have an effective cost of more than 15 percent per annum, including interest and charges.
  • Kingdom Bank’s loan book shrank to Sh4.4 billion last year compared to Sh5.5 billion in 2020, with the shift in the strategy set to reverse the decline.

Kingdom Bank is applying part of the Sh20.9 billion it received from the Central Bank of Kenya (CBK) to give loans, a strategy that seeks to enhance returns from the cash on which it is not incurring interest expenses.

Besides lending, the funds will be used to support liquidity. The shift to using part of the cash to issue loans has been disclosed by Kingdom’s parent company Co-op Bank in its annual report.

“Kingdom Bank …changed its business model on managing the government securities initially held at amortised cost to allow for a more aggressive approach on the funds received from Central Bank of Kenya to be utilised for lending to customers on a need basis, improve the liquidity position and revive the bank,” said Co-op Bank.

Most bank loans denominated in Kenya shillings have an effective cost of more than 15 percent per annum, including interest and charges.

This makes lending more profitable compared to alternative cash management alternatives such as investing in treasury bills and fixed deposits whose return is less than 10 percent per annum.

Kingdom Bank’s loan book shrank to Sh4.4 billion last year compared to Sh5.5 billion in 2020, with the shift in the strategy set to reverse the decline.

It will also bring a balance to the institution’s asset mix which is concentrated in government debt securities at Sh23.6 billion or 74.3 percent of total assets as of December.

The interest rate on the CBK loan, which is repayable in 10 years with a three-year moratorium, is zero.

This means Kingdom Bank stands to generate substantial profit from the cash, enabling it to become a strong stand-alone institution.

The fact that the regulator waived interest on the funds underlines its unprecedented support for the lender which was acquired by Co-op Bank in a rescue deal.

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