Markets & Finance

Banking industry growth stagnates as lenders go down

Kenya’s banking industry stagnated in the first three months of the year, signalling a slowdown following the collapse of three lenders, data from the Central Bank of Kenya shows.

Dr Patrick Njoroge told Parliament that customer savings with commercial banks stood at Sh2.6 trillion in March, the same level as in December.

The gross loans in March were Sh2.2 trillion compared to 2.299 trillion in December, with banking assets shrinking marginally to Sh3.6 trillion from Sh3.7 trillion over the same period.

In the first quarter of last year, banks mobilised Sh85 billion in deposits and disbursed loans worth Sh67.4 billion.

Three banks have been closed in the last nine months, creating concern over the health of the banking sector.

“Contagion effects of these actions particularly on liquidity distribution in the banking sector are being contained through coordinated actions spearheaded by the Central Bank,” Dr Njoroge said.

Slacking confidence in the financial sector could have the effect of slowing down economic growth due to lack of credit to finance development.

The data indicates some people could have opted to look at other options outside of the banking sector such as saccos and treasuries to keep their cash.

Small lenders have suffered the heaviest blow from the collapse of Dubai Bank, Imperial and Chase Bank as depositors sought safety in large institutions perceived to be more stable.

Low deposit inflows have forced some of the small banks to stop lending to avoid slipping into a cash crunch.

A cash crunch would force a bank to seek liquidity at whatever price, exposing it to interest losses.

The level of bad loans in the banking sector has also hit a ten-year high at eight per cent of the total loan book, signalling more trouble for the lenders.

With a total loan book of Sh2.2 trillion, this means the bad loans are at Sh176 billion, up from Sh139.4 billion in December—a Sh36.6 billion increase in the first three months of the year.

A stagnant loan book results in an increase of the non-performing loans as a percentage.

Banks have in the past relied on booking of new credit advances to report high quality loan book.

READ: The thorny issue of bad and doubtful loans in local banks

Closure of the three banks also caught the attention of the executive with President Uhuru Kenyatta seeking to reassure the public that the banking industry was stable.

Imperial Bank went under while holding an estimated Sh88 billion in deposit while Chase Bank had Sh95 billion of public savings but has since re-opened. The collapse of the three lenders has been blamed on peculiar corporate governance issues facing each of them, with CBK insisting it was not a systemic failure.

Huge unreported insider lending has been identified as the key cause of the collapses, resulting in CBK ordering fresh audit of insider loans across the sector, which is further likely to reduce profit.

Last year the banking sector posted the lowest profit growth in more than a decade as the effects of change in regulatory environment kicked in.

The banking sector’s pre-tax profits grew by 2.8 per cent to Sh145 billion last December from Sh141 billion an year earlier.