"It will take a partnership between banks, Treasury, parliament and central bank to find a joint solution that works for our customers."
KCB Group #ticker:KCB this week announced its Q1 net profit hit Sh5 billion, a 14 per cent growth from the same period last year. Its investment in government paper saw a flat growth of 1.5 per cent in a year when rate caps ate into Kenyan lenders' earnings.
The Business Daily’s Laban–Cliff Onserio had a conversation with CEO Joshua Oigara about KCB's growth trajectory, the impact of technology on its business and recent changes in the industry's regulatory environment.
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Let us look at your just released financial results, you reported a 14 per cent growth in net earnings in the first 3 months of 2018. What were the key drivers?
A lot of that is on the mobile side and our transaction with customers, but what we are seeing now is that we have learnt to adjust to the environment of the interest rate cap. We are in the second year of this environment and learning the model of our business. We are seeing new loans in manufacturing, new programmes in PPPs – what we are running now is a different kind of business. We are also seeing lots of our business internationally doing well than last year.
So the environment is good with the previous year being much more difficult. This 14 per cent growth is something we would like to do for this entire year of 2018, it is a good environment we are much more stable as we are as a business. We are launching a new payment platform with Huawei, as a way of ring fencing our business as Kenya’s largest bank and in the region.
Still on your results, there was a near flat growth in your investment in government treasury bill and bonds, what do you attribute this to?
Our large view is that we are putting all our funds to lend into customers so we always have to balance. We are not a bank that puts all our money in government paper. If there is an opportunity to lend to our customers in whatever sector they are in such as financial institutions energy, manufacturing, housing or healthcare, you will see our loans are up by 10 per cent in the first quarter of the year. The banking sector has been investing a little bit more on government paper and fixed income largely because of the interest rate cap but we are seeing our life beyond the cap as a bank.
There has a push from the banking sector towards the scrapping of this law under which you seem to thrive, let us give it a very critical view.
What we are looking for is an open market environment for any sector, that is how we see it. So what banks are asking for is an industry to go back to where markets are available and you can determine your commercial rates. What we don’t agree with is the way the cap was proposed. What banks are discussing now is alternatives to how banks can provide affordable credit to customers so we can provide equivalent pricing for products we have in the market.
The proposals we had before the cap is exactly what the banks are bringing up. We are saying, we will listen to the risk based, please adjust the pricing for our customers. Let us assume your credit score is 100/100 you should get a better price and vice versa. There should be differentiation on pricing for our customers, that is what we are pushing for as an industry.
Obviously it is a debate, I do not think banks have a solution. It will take a partnership between banks, Treasury, parliament and central bank to find a joint solution that works for our customers. Ultimately, banks should be responsible... days of charging 25-30 per cent interest to customers are long gone. We are not asking for a repeal of the rates to bring back those old rates before, if it was to happen then the banks will have failed customers.
There have been countless campaigns calling for its repeal, from the bankers' association, to the central bank and yourselves as the affected, do you see yourselves reaching a truce in this?
Well, a lot of it is going to depend on parliament. We can do all the talk and all the lobbying, the members of parliament need to be convinced. There is still a wrestling match as we speak. I propose that there should be some amendments but how those amendments will look like is an issue that will be determined by members of parliament when they discuss but we are positive. It may not be what banks are looking for but it will be an improvement from the current regulation we have today.
Let us look at changes in International Financial Reporting Standard (IFRS 9) and its impact on your provision on bad debts. How has this impacted on your numbers?
It is a major issue for the industry because IFRS 9 requires that we provide for our loans based on expected loss model in our industry that means we need more capital. We need to understand better the sectors we are operating in, we need to understand what drives their risk and how do we perform and if there is a gap or a shock, then you increase the level of provision.
We have adopted IFRS 9 from January this year and from capital point of view we are still very solid, although Central Bank has provided a window for 5 years for banks to comply. It is a complex standard I must say and we will spend more time explaining to our stakeholders what it means for them and what is different from the old model IAS 39 to IFRS 9.
If that is not enough on your regulator space there have been tax changes mooted recently. How do you see theproposed income tax laws in particular affecting market liquidity levels?
It is quite early to say what the impact will be. My own view generally is that if taxes need to be raised as long as there is service delivery for themselves, there is no issue about raising taxes. The concern nationally is that taxed are being collected but you cannot link what the taxes are doing in the economy today.
What I suspect is that there will be an impact on smaller businesses, if you raise the taxes without providing an enabling environment the competitive environment will be more difficult than countries we are competing against.
Ultimately, I think Kenya has delivered in ease of doing business rankings in the last 3 years. If you can deliver services into the Country and ease the business environment taxes may be the only way to achieve that objective, deliver services and then we can bring in more business.
Let us talk about banking technology (fintech) and the move to banking models of the future in view of technology shift from brick mortar to mobile and online, how are you adapting to it?
We are seeing today is that a lot of our customers are largely tech savvy, with the penetration of mobile by about 95-96 per cent in Kenya, brought about by the M-Pesa revolution, we are seeing that customers are looking for services from their banks than coming to the branches. We have been investing in new payment platforms, algorithms for credit, on-boarding our customers from mobile devices so they do not have to come to our branches and being able to give them a credit score.
So far we have more than 10 million customers on this platform. In fact, if you look at all our customers of 15 million, more than 2/3 come through on mobile devices. This is the way we going to go, most customers do not come to the branch. What we are seeing in the future is more than 80 per cent of our bank business will be driven from our digital channels and especially mobile.
Lastly, how are you angling to be a bank of the future in view of technology disruption your adaptability?
We see a lot of innovation coming in to new models. There is a lot of conversation on the consumer side, using technology particularly mobile bringing in artificial intelligence (AI), using robots particularly to determine customers. The robotics, customer service, creating applications it is a self-service model where we are going as a bank and I believe Kenya is standing globally in this kind of business.
On the corporate side, which we do not talk about - the big projects, it is like the yin and yang, you need your enterprises to run the race of innovation and transformation and pull along your individual customers. If these two are running collectively, then you got a fantastic case of collaborating and building our economy towards the 8 per cent - 9 per cent growth rates.
