…top-of-mind amongst bankers in East Africa is the expectation that the Kenyan government would repeal the law capping interest rates. Since the legislation, credit has slowed. Mr. Mutua lets in on his expectations: “We expect the interest rate caps to be repealed through an act of parliament – sometimes in 2018.
What are the recent trends in the East African banking industry? And what does the future portend for the sector in the region? For perspectives on these questions, African Banker got the views of two highly-esteemed Nairobi-based banking professionals: George Mutua, managing director and chief representative officer for the Kenyan office of Societe Generale, a French bank, and Elizabeth Ndungu, head of research at Genghis Capital Investment Bank. Expectedly, Kenya, the region’s largest economy, dominates. And government policy there is perhaps the most stifling for the sector at the moment. The good news is that there are indications some of the measures might be reversed. First is the capping of interest rates on commercial loans at 4 per cent above the central bank rate by the Kenyan government. Another is the recently introduced 0.05 per cent “Robinhood tax” on cash transfers of more than Sh500,000 from July 1; which halved daily interbank volumes in the first week alone. A proposed Financial Markets Conduct Authority in Kenya also adds to increasing concerns about over-regulation.
There is probably a need for stiffer rules, though. For instance, 10 Kenyan banks are currently under investigation for accepting stolen funds. But stronger rules could be self-defeating if they end up weakening the ability of central banks to rein in erring banks. For evidence, reformist Central Bank of Kenya (CBK) governor, Patrick Njoroge, put it bluntly: “The [Financial Markets Conduct] bill emasculates the central bank”, adding the CBK “…is under attack.” Without doubt, there is increasing political interference in the region’s central banks and indeed elsewhere on the African continent. Curiously, Tanzania’s President John Magufuli, well-known for his heavy-handedness, does not plan to bail out struggling banks in his country: “I will not give any money to failing banks,” Mr. Magufuli said earlier this year in March, adding “it’s better to have a few viable banks than dozens of failing banks.” The recurring theme is clearly one where, on the one hand, governments in the region are more overbearing on banks with more regulations, while on the other hand, in the Tanzanian case, for instance, not so supportive of those that flounder.
Reduced Profits, Rising NPLs
Undoubtedly, top-of-mind amongst bankers in East Africa is the expectation that the Kenyan government would repeal the law capping interest rates. Since the legislation, credit has slowed. Mr. Mutua lets in on his expectations: “We expect the interest rate caps to be repealed through an act of parliament – sometimes in 2018. This should lead to more lending by commercial banks to the SME sector. Easier access to credit will drive economic growth and should improve GDP growth.” Ordinarily, banks were increasingly loading up their books with government securities. The rate cap made doing so more a necessity than a strategy. Should the rate cap be abolished, SG’s Mutua believes “banks would invest less in government securities and more in the private sector.” The move would be beneficial for banks’ bottomlines, certainly with “interest margins to increase gradually as banks take more risk and charge relatively higher margins to the private sector,” Mr. Mutua adds.
Even as it is expected that the authorities would abolish interest caps in Kenya, they would continue to rein hard on banks who charge their customers disproportionalely. SG’s Mutua believes there would be “stiffer regulation on how and what banks charge to borrowers [with] the Central Bank of Kenya [insisting]…on transparency on the type and amount of financial cost”.
Genghis Capital’s Ndungu provides additional insights: “The banking industry in Kenya has experienced a challenging operating environment over the past year. This has mainly been attributed to interest rate caps introduced in the third quarter of 2016 that has seen banks record reduced profitability on account of reduced net interest income. In response to this, we have witnessed banks adjust their business models through a combination of initiatives aimed at reducing costs such as cutting down branches, laying off staff and enhancing operational efficiency, coupled with revenue diversification, so as to tap into non-funded income.”
On interest rate caps, Ms. Ndungu’s view is thus: “While the interest rate caps have been a pain to the banking sector in Kenya, the East African region has been grappling with increasing non-performing loans (17.4% in Burundi, 12.4% in Kenya, 8.2% in Tanzania and Rwanda, 6.2% in Uganda), primarily on account of the high interest rates in neighbouring countries and inadequate risk assessment, which could affect economic growth in the region adversely. Lending rates in Uganda, Tanzania and Rwanda range between 18.0% and 21.0%, which has seen borrowers suffer the full brunt of accessing credit and led to high default rates. This in turn has stifled private sector credit growth as banks enhance risk management to curb this trend.” On NPLs, for Kenya at least, SG’s Mutua observes “no major shift in NPL levels considering that banks have been forced to clean-up their books and make provisions in good tome by the Central Bank of Kenya,” however, and expects “credit growth in agriculture, construction, manufacturing, retail/FCMG – as banks come up with a lending mandate in support of the president’s Big Four [agenda]”.
Stiffer Regulation, Consolidation, Regional Expansion and New Entrants
Even as it is expected that the authorities would abolish interest caps in Kenya, they would continue to rein hard on banks who charge their customers disproportionalely. SG’s Mutua believes there would be “stiffer regulation on how and what banks charge to borrowers [with] the Central Bank of Kenya [insisting]…on transparency on the type and amount of financial cost”. Another development Mr. Mutua expects is “…more consolidation in the banking industry – across the industry in the region. We still have too many small banks in Kenya, Uganda, Tanzania and there’s need for consolidation. It will be pushed by both business viability needs and regulatory requirements on adequate capital levels. We see the big local banks continuing to expand and deepen their presence across the region. [And] top local banks in Kenya, Tanzania, Uganda will start looking for regional dominance.” Mr. Mutua also sees “the continued adoption of mobile-money and digital solutions by banks over additional/new investments in brick and mortar network [and an] increase of the agency banking model. Furthermore, there should be “more and better market segmentation with a new emphasis on wealth management, financial planning solutions,” SG’s Mutua believes.
SG’s Mutua also sees the “entrance of new global and regional payers – the likes of JP want to establish a representative office covering East Africa in Nairobi…He also expects “more competition from local banks – empowered by mobile money solutions, agency banking, and digital banking…”
On the outlook for NPLs and banking in the East African region, Genghis Capital’s Ndungu says: “Going forward, we expect this trend to be managed as banks tow in line with the requirements of IFRS 9, that requires a forward looking approach in loan provisioning. This will force banks to be more prudent in their assessment and will also require fiscal consolidation (government support) in order to ensure that private sector credit growth in the region does not deteriorate as a result of the crowding out effect. With a population growth rate of 3.0%, compared to other developed countries below the 1.0% mark, coupled with increasing financial inclusion and more uptake of financial services products, the East African region offers an attractive proposition for long term investors looking to take advantage of the attractive valuations.”
SG’s Mutua also sees the “entrance of new global and regional payers – the likes of JP want to establish a representative office covering East Africa in Nairobi. The replacement of Barclays by ABSA in Kenya and Tanzania. He also expects “more competition from local banks – empowered by mobile money solutions, agency banking, and digital banking- the “traditional” local banks will pose new competition to established international brands in the region.” In conclusion, Societe Generale’s Mutua sees “more and better regulation of banks in Tanzania, in terms of how they classify and provide for bad debt in their books, more focus on supporting/financing intra-Africa trade [as] banks in East Africa…target traders involved in exports and imports across Africa, better and stronger relationships with multilaterals, DFIs, insurance bodies, to put in place guarantees and de-risking solutions that will make certain sectors [like] agriculture, commodity trading more bankable.
Rafiq Raji, a writer and researcher, is based in Lagos, Nigeria. Twitter: @DrRafiqRaji
An edited version was published in the Q3-2018 issue of African Banker magazine.