Commercial banks are lobbying the Central Bank of Kenya (CBK) ,to use profit after tax as a measure to calculate licence fees and drop its proposal to use revenues, a change that will see the regulator forgo collecting billions.
Kenya Bankers Association (KBA), the industry’s lobby group, argues that basing permit fees on gross annual revenue (GAR) as proposed by CBK unfairly impacts banks that report high revenues but have high operational costs.
CBK is in the process of reviewing licence fees paid by commercial banks that have been stagnant for 35 years despite the exponential growth of banks. CBK argues it needs to collect more to play its oversight role better and avoid the risk of banks getting ahead of the regulator.
The regulator’s proposal is for the licence fee to be pegged at 0.6 percent of a bank’s gross revenue this year, with the rate being graduated to 0.8 percent next year before settling at one percent in 2028.
Gross annual revenue includes income from interest on loans, advances, government securities, fees and commissions on loans and advances, dividend income, foreign exchange trading income, and any other income.
The Central Bank had conservatively estimated it would collect Sh4.5 billion in licence fees if the gross revenues method was adopted. Banks reported total income of Sh899.3 billion for the year ended 2024, indicating the permit fees would well exceed Sh5.3 billion.
Under the KBA proposal to have the permit fees as a percentage of profit after tax, the regulator will collect approximately Sh1.2 billion, based on the industry’s Sh207.8 billion net profit for 2024.
Currently, the industry uses a branch-based methodology with banks paying between Sh30,000 and Sh150,000 for each branch, depending on locations and head office charges of Sh400,000.
The Central Bank collected Sh335 million under licence fees for the year ended June 2024.
“Revise the methodology from gross annual revenue (GAR) to a more equitable model, such as profit after tax basis or tiered fixed-fee structure based on bank size,” said KBA in a presentation to CBK.
“Banking fees as a percentage of GAR takes the nature of a tax, which is not desirable,” adds the lobby group.
Change of the methodology not only assures CBK of collecting higher revenues but also puts the National Treasury in line for more dividends as the principal owner of the Central Bank. The Treasury, as a dividend recipient from CBK, would be more inclined to higher collections from an industry that has been posting mega profits year on year.
The bankers are pushing back against the regulator's recommendation, arguing that high fees will force them to increase lending rates so as to absorb the new cost.
“If regulatory fees substantially increase operating costs, banks may increase lending rates to maintain profitability, making credit more expensive for businesses and individuals,” said KBA.
“Basing the fees on net profit with a minimum fee for banks making losses would ensure fairness for banks with a huge cost structure” noted the lobby group.
CBK did not respond to queries sent by Business Daily despite numerous follow-ups.
CBK had recommended the new fees to take effect this year, with banks required to pay 14 days after publishing their financial results.
The regulator acknowledged that using gross annual revenue was unfair but still chose it, arguing it had been successfully implemented by other regulators locally and internationally. GAR is used locally by the Capital Markets Authority and the Communication Authority of Kenya and by neighbouring countries such as Uganda and Rwanda.
“This (GAR) may not accurately reflect a bank's ability to pay. Some banks may have high revenues but low profit margins, while others may have lower revenues but higher profitability,” CBK noted in its analysis.
As per the 2024 financial performance, Equity Bank, which has a wide branch network in the country, would pay Sh841 million under the GAR formula compared to Standard Chartered’s Sh331 million.
However, if the net profit method was adopted, the gap would fall significantly, with Equity being required to pay Sh144 million, while Standard Chartered, which targets the corporate market, pays Sh120 million.
KCB Bank would pay a fee of Sh1.1 billion if gross revenues were applied --more than triple some of its peers in the top tier - but Sh270 million if the regulator used net profit.
A memo released by CBK did not show whether the regulator considered using profit as a basis to determine licencing fees.
Other financial parameters that CBK considered as a peg for the permit fees include total deposits and asset base. CBK dismissed using deposits or assets as a benchmark due to the adverse effect that the methods would have on the banks’ profitability.
Analysis by CBK showed that charging one percent of assets as licence fees would reduce profits by commercial banks by up to 27 percent, while deposits would cut earnings by up to 19.4 percent.
Charging one percent of deposits would see five banks in tier three drop into a loss-making position, while pegging on assets will push six small banks into losses.
CBK estimates that the use of gross annual revenues will reduce profits by 3.1 percent and pull one small lender into a loss-making position.
“The GAR methodology provides a holistic approach to performance of a bank as it is the result of employment of a bank’s assets and liabilities,” said CBK.
“Gross Annual Revenue (GAR) is a better measure of financial performance than deposit-based or asset-based methodologies,” added CBK.
KBA is seeking the exemption of exceptional one-off earnings and certain income streams, such as dividends from subsidiaries or profits from forex trading, while calculating revenues if the GAR method is adopted. The lobby argues these income streams are erratic and do not represent sustainable earnings of a bank.
The association also notes the proposed one percent fee is higher than that adopted by any of the regulators in jurisdictions where GAR is used.
“Kenya’s fee structure should be guided by the country's financial services strategy policy that seeks to make Kenya the regional financial hub and therefore competitive in attracting investments in the sector. The approach adopted is contrary to this principle,” said KBA. In Uganda, the fee is 0.05 percent of revenue, while Rwanda charges 0.5 percent.
