East African banking growth continues despite global crisis

The Bank of TanzaniaEven with the global economic meltdown hitting Africa, Kenyan banking sector has continued to grow confounding many local analysts.

According to the Central Bank of Kenya (CBK) Governor Prof. Njuguna Ndung’u, the sector’s assets increased by 11 per cent to Ksh1.31 trillion at the end of September 2009 as banks continued to expand their lending portfolio. Deposits increased to Ksh1 trillion in October 2009 due to deposit mobilization and expansion of branch networks by banks. The sector recorded higher than required capital adequacy ratios. As at September 30, 2009, the Capital Adequacy Ratio stood at 20 per cent and was above the statutory minimum of 12 per cent.
"This is an indicator that the sector has a substantial cushion against periodic shocks,” noted Prof Ndung’u. The number of branches at the end of September 2009 stood at 918 an increase of over 154 branches from the corresponding period in 2008.

Opening up
A financial survey conducted by Financial Sector Deepening (FSD) Kenya in June 2009 indicates that only 40.5 per cent of Kenyans have access to formal financial services. Opening of new branches, even in remote outposts, have brought banking services to many Kenyans especially those in rural areas.
“We now enjoy services we could only have dreamt about with the opening of the bank. We do not have to travel long distances for banking services,” said Jane Mathenge, a resident of Subukia township in Kenya’s Rift Valley province. Equity Bank - one of the country’s fast expanding firms has opened an Autobank - a stand-lone automated machines in the townships. “A customer can deposit and withdraw cash from the autobank without the need of personnel. Though there is a person nearby to rectify the machine if it fails, the service is profitable to the bank as well as convenient to customers especially in rural outposts,” said a bank official. Farmers such as Mrs. Mathenge can now withdraw their milk dues from the ATM without having to travel over 50km to the nearest town, Nakuru.
To enhance access to financial services, the Central Bank together with other stakeholders are working on a legal framework that will enable banks to carry out branchless banking through the use of third party agents such as Saccos, microfinance institutions and retail outlets.
“The new banking module will use the third party agents such corner shops, Saccos, micro-finance institutions, retail outlets and petrol stations. This will bring banking to the people closer and with lending terms acceptable to them,” said Equity Bank CEO James Mwangi during an interview with a local television station.
While the Kenyan economy grew to a high of 7.1 per cent in 2007, the global economic meltdown and the effects of the post-election violence in early 2008 brought the growth down to just 1.7 per cent.
The International Monetary Fund (IMF) has forecast Kenya's economy to improve gradually, saying it will grow by 2.7 per cent this year.
"Economic performance is expected to improve gradually, but as risks remains, therefore policies should aim at addressing emerging challenges and promoting sustainable high growth," the IMF said in a statement issue in Nairobi.
Yet even with these uncertain economic times, the banking sector registered impressive results. The Standard Chartered Bank managed to post a 41 per cent growth in earning. The Kenya Commercial Bank (KCB) – the biggest bank by branches posted a 32 per cent growth in interest income and 9 per cent decrease in non-interest earning in the third quarter of the year. It has over 200 branches inside and outside the country and posted a Ksh5.3bn in profits. Most of its profit comes from its regional branches such as one in Southern Sudan. On its part, Equity Bank reported a 40 per cent increase in net interest income to Ksh6.7bn. The bank has branches in Kenya, Uganda and Southern Sudan.
The banks seem to be benefiting from increased interest income on loans. However, the non-interest revenue from transaction fees has been falling due to pressure from mobile money transfer services like MPESA and ZAP as lower forex volatility. Bank have decried the continuing gnawing of their money transfer services by the mobile phone companies such as Safaricom’s MPESA and Zain (Kenya) Zap. But the Kenya economy is slated to show growth in 2010.

More growth on the horizon
Already, signs of recovery have become evident. Swelling tourist arrivals, increased tea output, upturn of the Nairobi Stock Exchange (NSE) and growth in cement production have been positive indicators of an upturn in economic trends. But to boost economic growth, officials have been calling commercial banks to lower lending rates to stimulate production. Average lending rate has remained above 14 per cent from a peak of 15.09 per cent mid-year.
“We challenge all the banks to lower their bank charges and lending rates to support private sector lending and investment and to push for economic recovery,” asserts the CBK governor Prof Ndung’u. By lowering the interest rates, the official adds, banks will be supporting economic activities that will generate employment and contribute towards achievement of the country’s Vision 2030 goals.
Senior adviser in the IMF's African department Michel Atingi-Ego said Kenya has the necessary space to ease fiscal policy and help sustain domestic demand in the face of slowing economic growth thanks to prudent economic policies that helped reduce public debt as a share of gross domestic product. As part of on-going reforms and to create confidence in the lending process, CBK has licensed CRB Africa as the credit reference bureau. CBK expects that sharing of credit information will lead to increased lending based on a borrower’s rating and will also cut the incidences of non-performing loans. The strength of Kenyan banks is now being felt in the region, specifically within the East African Community. Most of the profits posted by the Kenyan banks are coming from their branches in the COMESA regions.
To facilitate information sharing and supervisory co-operation amongst the Central Banks, particularly for regional banking groups, the five East African Central Banks signed a Memorandum of Understanding early in 2009.
“This arrangement will serve to mitigate cross border risks that regional banking groups may pose to the financial sectors of the East African countries,” observed Prof Ndung’u.
At the same time, the commercial banks are expected to reap from the government fiscal stimulus package. Since July 2009, the government has borrowed an estimated Ksh49.5bn from the domestic market. This has come through the sale of infrastructure bond to finance a Ksh109bn budget deficit. The borrowed funds are to be used to finance specific projects in the roads, energy and water sectors.

Mwangi Mumero

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