Wealthy Kenyans move money from small banks

Central Bank of Kenya (CBK) building in Nairobi. FILE PHOTO | NMG

What you need to know:

  • Placement of three-mid-sized lenders under receivership triggered shifts in accounts with more than Sh100, 000.
  • In contrast, the small and medium-sized banks witnessed a drop in the number of quality savers by 176, 244 accounts or 36.5 percent to 305,688 last year.

Wealthy savers moved their cash from small banks in the three years that followed three mid-sized lenders being placed under receivership after failing to meet their obligations.

Central Bank of Kenya (CBK) data shows that small banks controlled 21.15 percent of the number of Kenyans with more than Sh100, 000 as savings last year, up from 34.73 percent in 2016 when three lenders were placed under receivership.

The top nine banks- classified by CBK as large—added 337,004 accounts with more than Sh100, 000 between January 2016 and December 2018.

In contrast, the small and medium-sized banks witnessed a drop in the number of quality savers by 176, 244 accounts or 36.5 percent to 305,688 last year.

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".

"Depositors were searching for safety after the collapse of three banks in quick succession. The onset of rate cap also meant smaller banks could no longer offer higher returns on deposits so the only bargaining factor became safety," said Patrick Mumu, a research analyst with Genghis Capital.

Kenya on November 7 ditched an interest rate limit that was introduced in 2016 and which limited loan charges at four points above the central bank’s benchmark - currently nine percent - to curb high borrowing costs. The cap has since been blamed for choking business activity and economic growth.

Most bank loans in Kenya came with the maximum 13 percent rate, but before 2016 they oscillated anywhere up to 27 percent, denying the smaller banks room to offer attractive deposit rates that made them attractive to big savers.

"Customers realised that no return was worth the risk of putting money in an unstable bank. Some confidence is building up now but 2017 was particularly bad as media continued to break stories of individuals and firms whose money was stuck in under-receivership banks," said the CEO of a small bank who sought anonymity.

In the three years to 2018, KCB , Equity, Co-operative Bank, Standard Chartered Bank, Barclays Bank of Kenya, Diamond Trust Bank, Commercial Bank of Africa Limited, Stanbic Bank Kenya and I&M Bank all gained more customers with savings above Sh100,000.

But small and mid-sized lenders like Spire Bank, Habib Bank AG Zurich, Sidian Bank, Paramount Bank, Guardian Bank Limited, Consolidated Bank, Bank of Africa, Development Bank and First Community Bank reported declines in accounts holding over Sh100, 000. Kenya Deposit Insurance Corporation (KDIC) —an independent agency that manages the deposit refund in collapsed banks—says Kenyans had become risk adverse after the placement of three banks under receivership in 2015 and 2016.

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 chief executive Mohamud Ahmed Mohamud says the agency and CBK are strengthening the model of identifying the struggling banks early for turnaround efforts before they collapse. Equity Bank had the highest number of accounts holding above Sh100, 000 at 330,121, which increased 12.5 percent from 2016.

Accounts with Sh100, 000 and more at KCB rose 15.2 percent to 228, 655 and 16.7 percent to 225,937 in Co-operative Bank. But Citi Bank, I&M Bank and Standard Chartered Bank ranked top among lenders with the larger share of wealthy accounts compared to their total depositors.

About 70 percent of accounts at Citi Bank, which mainly serves corporate clients, had more than Sh100, 000.

At Equity Bank, those with more than Sh100, 000 accounted for three percent of its 10.9 million accounts, reflecting its traditional strategy of targeting the low-income segment.

Mr Mumu said the increase in compensation for deposits in collapsed banks to Sh500, 000 from the current Sh100, 000 will ease the risk profile of small lenders. The Sh500, 000 compensation will apply from July 2020.

The Sh100, 000 compensation had exposed wealthy savers to higher losses in the event of bank closures as the refund has not been adjusted to capture changing economic realities over the three decades.

"The move is likely to boost confidence in small and mid-tier banks because people will be assured of more money in case of collapse," said Mr Mumu, adding that the removal of the rate cap will allow the smaller lenders to offer attractive deposit rates.

The number of Kenyans with more than Sh100, 000 as savings in their bank accounts dropped for the first time in more than 13 years, reflecting the cash flow problems in an economy plagued by job cuts and modest economic activity.

The CBK data shows that savers with more than Sh100,000 in their bank accounts dropped to 1,445, 590 last year, down from 1,583,000 in 2017 — the first fall since 2006 when the regulator began making such deposit data public.

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