Deposits in small banks on the rise: survey

Kenya’s Tier III lenders posted the highest growth in customer deposits in 2018, signalling a rebound in customer confidence which was largely eroded by the collapse of three banks in 2015 and 2016.

An assessment by the Kenya Bankers Association, an industry umbrella body, shows the country’s third-tier banks grew their deposits by 33 percent in 2018, the highest pace since 2010. This was also significantly above the industry’s average of 10.7 percent.

"The fact that they registered a 33 percent deposits growth in 2018 compared to nine percent in 2017 is a commentary that market confidence is continuously being entrenched in this market segment," KBA said in its State of the Banking Industry Report released this week.

Despite the growth, however, the share of Tier Three banks of total deposits in the banking industry remained relatively small and not likely to substantially influence the overall growth of deposits.

The collapse of Dubai Bank in August 2015, Imperial Bank in October of the same year, and Chase Bank in April 2016 led to panicky withdrawals from smaller banks to larger ones which were considered safer, in what was popularly known as "flight to quality".

Their collapse also negatively impacted on the property market as some of the banks were involved in property development either directly or indirectly.

Drop in deposits

As a result of the collapse of the three, other small banks suffered a 2.1 percent drop in deposits in 2016, signalling that depositors were hesitant to bank their money with them.

"The general perception has been the smaller you are, the more risky you are, but what we have seen (based on 2018 performance) is contrary to that perception," said Jared Osoro, the director of KBA's Centre for Research on Financial Markets and Policy.

"Contrary to the perception over the last three years, there’s sense of calmness which appears to be back."

In 2016, the Central Bank of Kenya, the banking industry regulator, opened a special borrowing window for the hardest-hit lenders to borrow from at a rate that was above the market rate. This window offered a cushion for the small lenders in a tough market.

Overall, the growth in deposits in the industry has been steady after the turbulence of 2015 and 2016, the latest KBA report shows.

Across the industry, deposits from six percent in 2016 to 9.2 percent the following year and 10.7 percent in 2018.

Highest interest

Compared to their bigger counterparts, small banks continue to pay the highest interest on deposits with their cost of funds standing just below three percent in 2018 (above industry average of two percent).

However, this had reduced from nearly 3.5 percent in 2017 and more than four percent in 2016, KBA’s assessment shows.

However, the big banks continue to enjoy some advantages.

"It is evident that economies of scale have played in favour of large banks when it comes to funding costs. The large banks have embraced the agency banking model to augment their wide branch network in mobilising deposits," the report states.

"This is in addition to the non-deposit funding avenue in the form of specialised lines of credit and access to capital markets that are not readily accessed by smaller bankers."