Commercial banks have grappled with a year of changing regulations, making them cling on government paper to stabilise their earnings.
Last year started with uncertainty over transitioning from International Accounting Standard (IAS) 39 to International Financial Reporting Standard (IFRS 9).
The new norm is forward looking as opposed to IAS 39, which was historical and this meant banks were to increase the level of provisioning and become stricter in calculating performing and non-performing loans. This put pressure on their capital.
The changes came at a time credit to private sector was also falling due to the rate cap law that was introduced in 2016.
As banks continued to seek a way out through layoffs, digitisation of services and closure of branches, the debate on removing the caps emerged.
In March, the National Treasury announced the push to remove the caps, which had been described by Central Bank of Kenya as “putting brakes” on the economy.
The Treasury then started preparing a consumer protection law to replace the legal caps on commercial lending rates. In May, Financial Markets Conduct Bill was published, proposing to abolish rate cap.
While Treasury said the law was meant to promote a fair, non-discriminatory market place for access to credit and provide uniform practices, Central Bank of Kenya (CBK) opposed the move saying it would make CBK a toothless dog.
At the same time, Kenya committed to International Monetary Fund (IMF) that it would makes adjustments to its economic policies including the possibility of scrapping the interest rates cap. This was part of conditions for getting Sh152 billion precautionary facility.
This lifted the confidence of banking stocks at the Nairobi Securities Exchange (NSE), #ticker:NSE leading to rebounding of prices as investors priced in the possibility of removing rate caps. However, this would later hit a snag in August after Parliament voted to retain the caps.
But in the process, MPs agreed to remove the legal requirement that lenders pay at least 70 percent of the CBK base rate on deposits. This opened room for banks such as Kenya Commercial Bank (KCB) and National Bank of Kenya to lower interest payments on deposits.
Lenders also faced new tax measures in the 2018/2019 budget statement that was presented in Parliament in June.
Treasury had recommended Robin Hood tax which required any cash transfers of Sh500,000 or to pay 0.05 percent tax.
This was contested in court by Kenya Bankers Association, arguing that the term ‘money transfer’ was vague and that they needed more time to comply since the computer software in use was not configured to support the charges.
With Kenya Revenue Authority keen to collect this tax, banks started putting customers on alert that they risked paying backdated taxes on all eligible transactions in case the suit was thrown out.
The law was later overtaken by events when President Uhuru Kenyatta, in his supplementary budget dropped it. He, however, hiked taxes on mobile money transfers.
With all these happening during the year, banks continued to deepen their stock of government paper, shying away from the public.
Up to end of September, the sector’s profits grew by 13.5 percent to Sh87.85 billion. Interest from government securities roses by 15.5 percent to hit Sh93.5 billion. This was in line with government security holdings rising by 15.1 percent.
The rise in income from government securities was much faster compared to interest from loans and advances, which grew by 0.4 percent to Sh212.2 billion.
Banks continue to battle rising non-performing loans (NPLs), reducing their appetite to lend to their sectors in the economy.
CBK governor Patrick Njoroge said last month that even though there was 4.4 percent growth in 12 months to October compared to September’s 3.9 percent, the year’s growth will not match CBK’s expectation.
“Our target for the year was seven or eight percent in 12 months to December. It looks like we will be below that,” said Dr Njoroge in Nairobi.
As many as six sectors such as trade, building and construction, real estate and consumer durables are in single digit percentage growth.
In October, NPL ratio fell to 12.3 percent from 12.7 percent largely due to decline in NPLs in trade, personal and household sectors but the governor says delays in payment remains of concern to banks.
CBK attributed October’s slight recovery in private sector credit on manufacturing, business services, finance and insurance and building and construction. However, for Agriculture, a key contributor to GDP, posted a negative growth of 5.7 percent.
Other sectors that booked a negative growth in credit were mining and quarrying (-12 percent) and transport and communication at negative eight percent.
This is despite loans to manufacturing, finance and insurance consumer durables and consumer durables growing at 14.9 percent, 9.1 percent, and 12.4 percent respectively, being above CBK’s overall target for the year.