Banks have been forced to become more creative in their income generation methods since Parliament imposed controls on the cost of loans
The refuge of government securities has also tightened due to falling yields on Treasury bonds and bills
An expected shift back to customer loans by banks is likely to grow further the amount they rake in from fees and commissions.
Bank customers paid Sh84.1 billion in fees, commissions and service charges in the six months to end of June, as the lenders devised new channels of boosting their revenue to compensate for lower interest income from loans.
An analysis of the half-year performance for 39 out of 40 Kenyan banks shows the lenders’ non-interest income increased by Sh12 billion (16.8 percent) in the first half of the year, helping to cover for slimmer interest margins.
The banking sector data shows non-funded income was the fastest-growing revenue stream for the lenders, driving the growth of their after-tax profit in the six months by 14.2 percent to Sh67.12 billion.
Interest income from customer loans, which is the banks’ core revenue stream, went up by only 1.3 percent or Sh1.86 billion in the period to stand at Sh145 billion. On the other hand, interest income from government securities rose by nine percent or Sh5.5 billion to stand at Sh66.6 billion.
Banks have been forced to become more creative in their income generation methods since Parliament imposed controls on the cost of loans in September 2016, which put a ceiling on the margins they can extract from their loan books.
Falling yields
The refuge of government securities has also tightened due to falling yields on Treasury bonds and bills, amid pressure on the government to curb its borrowing costs.
The increased use of digital platforms to disburse loans and handle transactions has opened new sources of fees and commissions for banks, helping them to navigate the interest rates cap.
Lenders have also increased the amount of fees and service charges on loans as a way of compensating for the loss of margin and inability to price in customers’ default risk.
"Most of the banks, especially the large lenders, are using these digital platforms to do a lot of lending. These products have facility fees, which the banks are leveraging on to grow non-funded income," said Patrick Mumu, an analyst at investment bank Genghis Capital.
The digital lending platforms operated by Tier One banks include Commercial Bank of Africa’s M-Shwari, KCB M-Pesa, Equity Bank’s Equitel and EazyApp, Barclays Kenya’s Timiza and Co-operative Bank’s M-Co-op Cash.
They have quickly gained millions of users, who are attracted by the ease of accessing loans and the convenience of banking without visiting physical branches.
Fees charged on loans are also not counted as part of interest charges, hence banks can load them above the capped rate of 13 percent.
"Since the capping of rates, we have seen a general rise in fees and commissions charged by banks for various facilities," said Mr Mumu.
The analysis of banking data shows that the large lenders, who control more than 80 percent of the market, have taken the lion’s share of non-funded income.
Equity Bank leads
Equity Bank #ticker:EQTY led the sector in the six months with non-funded income of Sh16.5 billion, up from Sh13.2 billion in the same period last year.
KCB #ticker:KCB grew its non-interest income by 15 percent to Sh13.2 billion, while that of Co-operative Bank went up by 25 percent to Sh8.8 billion.
Stanbic Bank increased its income from non-interest sources by 10 percent to Sh5.8 billion.
Fees and commissions from forex trading and handling of the growing remittances from abroad have also helped banks to grow their non-interest earnings.
Larger banks which are dominant in forex trading have particularly gained from this, while leveraging on their international linkages to offer Kenyans in the Diaspora a platform through which to send money home.
Monthly remittances from abroad in the first six months of 2019 have averaged Sh25 billion ($241.62 million), compared to an average of Sh23.8 billion ($229.75 million) in the first six months of last year, and Sh15.3 billion ($147.93 million) in a similar period in 2017.
Customer loans
An expected shift back to customer loans by banks is likely to grow further the amount they rake in from fees and commissions.
Banks have indicated a willingness to lend more to the private sector due to the falling government paper yields.
The potential review of the rate cap, which the Treasury is trying to have repealed in Parliament, could also see them trooping back to their customers.
While their stock of government securities remains high at Sh1.3 trillion, having grown by Sh152 billion or 13.2 percent year-on-year, the loan book is also expanding at a faster pace than last year.
It grew by Sh172 billion or 7.1 percent to Sh2.62 trillion between June 2018 and June 2019, compared to a growth of 2.5 percent or Sh58 billion between June 2017 and June 2018.
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