Capital Markets

Wealthy Kenyans move cash from small banks’ safes

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Central bank of Kenya. FILE PHOTO | NMG

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Summary

  • The Central Bank of Kenya (CBK) data shows that small banks controlled 5.84 per cent of accounts with more than Sh100,000, down from 13.26 per cent in 2017 as depositors sought safety in larger institutions.
  • The 21 small banks — classified by CBK as low-tier — had 90,572 quality accounts last year compared to 210,047 in 2017. In contrast, the top nine banks added 461, 555 accounts with more than Sh100,000 between January 2016 and December 2019.
  • Depositors and investors in Kenya were rattled three years ago when the CBK took control of three mid-sized lenders -- Chase Bank, Imperial Bank and Dubai Bank-- after the banks ran into financial trouble.

Small banks have lost more than half of accounts holding above Sh100,000 as wealthy savers moved their cash to large lenders in the wake of three mid-sized financiers being placed under receivership after failing to meet their obligations.

The Central Bank of Kenya (CBK) data shows that small banks controlled 5.84 per cent of accounts with more than Sh100,000, down from 13.26 per cent in 2017 as depositors sought safety in larger institutions.

The 21 small banks — classified by CBK as low-tier — had 90,572 quality accounts last year compared to 210,047 in 2017. In contrast, the top nine banks added 461, 555 accounts with more than Sh100,000 between January 2016 and December 2019.

Depositors and investors in Kenya were rattled three years ago when the CBK took control of three mid-sized lenders -- Chase Bank, Imperial Bank and Dubai Bank-- after the banks ran into financial trouble.

This triggered panic withdrawals from smaller banks and shift of cash to the larger lenders that were considered stable in what was dubbed "flight to quality".

The Kenya Deposit Insurance Corporation (KDIC) — an independent State agency that manages deposit refunds in collapsed banks — last July raised compensation for depositors in collapsed banks to Sh500,000 from Sh100,000 to help ease the discomfort with the small banks.

KDIC chief executive Mohamud Mohamud says Kenyans had become risk-averse after the placement of three banks under receivership in 2015 and 2016, hurting small lenders.

"Our role together with National Treasury and CBK is now to create a level playing ground where all banks will be viewed as safe and sound to avert such scenarios of depositors moving money to what they view as large banks," said Mr Mohamud.

"The revision of the cover and introduction of risk-based premiums is a way of collapsing the view of banks as small or big and encourage depositors to confidently put money in any bank."

The low compensation had exposed wealthy savers to higher losses in the event of bank closures because the refund was not adjusted to take into account changing economic realities over the three decades.

The increase in compensation of up to Sh500,000 was the first rise in 30 years.

Out of the three lenders placed under receivership, Dubai is facing liquidation but Chase Bank and Imperial Bank had their good loans and deposits transferred to State Bank of Mauritius (SBM) and KCB respectively.

KDIC says the increase from Sh100,000, which has remained constant since 1989, will cover about 99 per cent of the depositors from the current 90 per cent.

The low compensation had exposed wealthy savers to higher losses in the event of bank closures because the refund was not adjusted to take into account changing economic realities over the three decades.

The top nine banks including KCB, Equity, Co-operative Bank and NCBA Group now account for 81.96 per cent of the total accounts holding in excess of Sh100,000, up from 78.8 per cent a year earlier. Equity leads with 347,787 accounts followed by KCB (253,958), Co-operative Bank (241,260), Absa (108,177) and Standard Chartered Bank with 71,645.

Medium sized ones’ share of quality accounts has reduced from 15.12 per cent to 12.2 per cent over the same period.

Capital-constrained and loss-making Spire Bank led the pack in losing quality savers, with accounts holding more than Sh100, 000 dropping by 823 or 30.5 per cent to 1,875.

Other banks which lost quality accounts include Paramount (392), Guardian (38), Consolidated Bank (34) and Jamii Bora Bank (35).

Consolidated Bank is grappling with meeting minimum regulatory capital levels while Jamii Bora Bank, which had capital and liquidity breaches, has since been acquired by Cooperative Bank and renamed Kingdom Bank.

The share of bank accounts holding more than Sh100,000 dropped to 2.49 per cent last year, reflecting the cash flow problems in an economy plagued by job cuts and growing income inequality.

CBK data show that the share of the high quality accounts dipped from 2.62 per cent in 2018 and 3.94 per cent in 2014.

The fall came despite the number of bank accounts holding more than Sh100,000 having increased by 105,639 last year to 1.55 million. But the share was squeezed by the sharp rise in new bank accounts by 7.1 million or 12.7 per cent to 62.3 million.