East Africa’s banks optimistic outlook despite challenges

East African banks remain upbeat reflecting the positive economic outlook for the region. 


The African Business ‘Top 100 Banks’ survey, which was published in October 2016, underlined the growing importance of East Africa in the continental banking industry.

The region has long been underrepresented in the Top 100 in comparison with the size of its population but has gained two entrants every year since 2013, taking it from 10 that year to 16 in the 2016 table. As a result, the combined value of the East African banks listed in the survey increased from $4.1bn in 2015 to $4.7bn last year.

This is partly a function of strong economic growth, particularly in comparison with the rest of Africa. The region is not as reliant on the export of oil, gas and mining commodities as the rest of the continent and has also benefited from low oil import costs over the past four years. The Kenyan and Ugandan economies have grown by an average of 5.5% a year since 2010, while Tanzania has managed 6.7%.

The biggest bank in East Africa, according to the 2016 African Business survey, is Kenya Commercial Bank, with Tier 1 Capital of $717m, a rise of $68m on 2015. It is closely followed by Equity Bank, which recorded a big increase from $515m in 2015 to $655m in our 2016 rankings, on the back of growth in its loan book and government securities.

Nairobi remains the most developed financial services centre in the region and now has 10 banks in the Top 100, all of which have more than $100m in Tier 1 Capital. Only Nigeria and Egypt have more. Credit ratings agency Moody’s classifies Equity Bank as the most secure in Kenya with a B1 rating because of the positive impact of its digital and agency banking strategy.

It reported in July: “Moody’s therefore expects that Equity Bank’s profitability metrics will remain strong, supported by its low cost funding, an increasing proportion of non-interest income, and an efficient cost structure with the extensive use of digital and alternative distribution channels.”

Equity Group CEO James Mwangi responded: “The rating reflects the bank’s intrinsic credit strength, significant market size, acceptable risk management practices, profitable business model, prudent capital levels and support from its shareholders. We continue to protect ourselves against slow business volumes by focusing on high margin plays and cutting on operational and funding costs.”

The biggest credit ratings agencies are assessing a growing number of banks in Sub-Saharan Africa, suggesting that international interest in African banking equities is increasing.

Capped interest rates

The Kenyan government has long been concerned that high interest rates were deterring potential borrowers and so last year passed legislation to regulate rates. The Banking (Amendment) Act 2016 capped loan interest at 4% above the Central Bank Rate from September 2016. The CBK main lending rate is currently 10%, giving a maximum commercial interest rate of 14%.

Private sector banks opposed the regulation but the CBK has promised to closely monitor the impact. Since the cap was introduced, banks have asked the CBK on 16 occasions for permission to increase their charges but only three of these requests have been granted. CBK governor Patrick Njoroge said: “The three are new products which we normally review and approve after going through the process.”

According to Kenya’s Private Sector Market Perception Survey in July, banks expect average growth in their loan books of 4.8% in the current financial year. Njoroge said: “Non-bank private sector firms expect a stronger growth relative to the May survey, largely due to macroeconomic stability and ongoing public infrastructure development.”

The growth of credit to the private sector stood at just 2.1% in the year to May 2017 but this was partly because of big scheduled repayments on manufacturing, transport and communications loans. Banks complain that the interest rate cap is forcing them to tighten their belts, although recent decisions on bank closures are in large part driven by the growth in mobile, agency and digital banking.

Standard Chartered Bank Kenya is to close four of its branches, in Bungoma, Kisii, Kitengela and Warwick, by the end of August. Affected customers and employees are being transferred to other branches. The company now has just 21 branches in Nairobi and 16 in the rest of the country. CEO Lamin Manjang explained: “We are continuously undertaking a branch rationalisation programme in line with our digital-by-design strategy.”

Barclays Kenya is to close seven of its branches by October, including five in Nairobi with one each in Wundayi and Meru. Managing Director Jeremy Awori said: “This is a consolidation move aimed at aligning our business to the current environment. No staff will be sacked. We have briefed impacted colleagues. HR will help them make a smooth transition as the changes take effect. Customers will have the freedom to choose any branch for their accounts to be hosted.” Bank of Africa has already closed 12 branches and made hundreds of employees redundant.

According to Central Bank of Kenya (CBK) figures, the total assets of Kenyan banks increased from KSh1 trillion ($9.5bn) in December 2015 to KSh4.1 trillion ($38.8bn) this June. CBK Deputy Governor Sheila M’Mbijjiwe said: “Despite the interest rates cap which has posed many problems for Kenyan banks, 70% of the estimated KSh5.98 trillion [$56.6bn] financial assets were from banks, exclusive of capital markets. Kenya’s return on assets stands at 4%, which is higher than those of South Africa at 1.7%, Uganda at 2.4% and Tanzania at 1.7% among others.”

As of December 2016, the average return on equity of Kenyan banks was 25.9%, just ahead of their Tanzanian competitors with 24.3% and those in Uganda with 14.7%.

Country by country breakdown

There are currently 42 banks in Kenya, most of which are locally owned, so there is a great deal of competition in the sector. Kenyan banks have put a great deal of effort into expanding into Tanzania, Uganda, South Sudan, Rwanda and Democratic Republic of Congo in recent years, in search of new customers and future profits.

However, while the rest of the region offers huge potential, it also offers many of the same problems as in the domestic market, including the proliferation of non-performing loans (NPLs). In Kenya itself, the proportion of NPLs increased from 5.4% in September 2012 to 9.5% in March 2017.


The situation is slightly worse in neighbouring Tanzania, where the ratio of NPLs increased from 8.2% in April 2016 to 10.8% this April. The Bank of Tanzania (BoT) announced that it had “continued to implement prudential measures to strengthen risk management practices in the financial sector and has directed banks with high NPL ratios to formulate and implement strategies to bring the ratio to at most 5%.”

In June, the BoT introduced tougher rules on capital conservation buffers. It said in a statement: “The minimum core and total capital ratios will remain 10% and 12% respectively…but banks and financial institutions shall be required to maintain a capital conservation buffer of 2.5% of risk-weighted assets and off-balance sheet exposures.”

The new rule has been a long time in preparation and is part of the country’s efforts to implement the Basel III guidelines. The 10% ratio requirement was introduced in April as part of a package of BoT measures to stimulate the economy because of a big fall in access to credit. Lending to the private sector increased by 26.8% in 2015 but by just 2.5% last year. Other measures introduced in April included a massive cut in the central bank’s main lending rate from 16% to 12%.

The BoT has revoked some banking licences in recent years in an effort to strengthen the sector, most recently that of FBME Bank in May. FBME specialises in foreign exchange services, cross-border transactions and commercial trading. In 2014, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) described the bank as a “primary money laundering concern”, prompting the BoT to take over its management. An appeal in the US courts earlier this year failed.

In a statement, the BoT said: “The Bank of Tanzania has discontinued all banking operations of FBME Bank Ltd, revoked its banking business license and placed it under liquidation.”

Mobile and agency banking is revolutionising access to banking services in a country where just 2% of the population has a traditional bank account. According to the Tanzania Communications Regulatory Authority, the number of Tanzanians with mobile money accounts reached 18.08m in the final quarter of last year, equivalent to 35% of the population, on the back of a 67% mobile penetration rate.

However, this is just a 4% rise on the 2014 mobile figure, suggesting that penetration is reaching something of a plateau. Moreover, penetration rates are not an accurate measurement of the proportion of the population with access to a mobile phone, as they are simply the size of the population divided by the number of active mobile phones.

Many customers have two or more subscriptions, so the actual proportion of the population with access to mobile phones may be much lower. Greater competition could improve the situation now that a fifth mobile operator, Halotel of Vietnam, has received a licence.

The CEO of First National Bank, Dave Aitken, says that there is room in the market for both traditional and new forms of banking. He added: “A huge portion of the population does not make transfers via bank accounts and instead uses mobile money wallets. While these wallets have already aggregated, and re-priced cheap liquidity, they are not an increasing threat to banks. Salaries deposited to bank accounts provide banks the opportunity to compete to facilitate payments, while for clients without bank accounts, mobile wallets provide a viable alternative payment option.”


Rwanda too is experiencing an interesting combination of growing bank profits and rising rates of NPLs. The National Bank of Rwanda (BNR) has announced that the rate of NPLs in its market increased from 6.2% in March 2016 to 8.1% at the end of June 2017.

Rwanda has one of the lowest main central bank lending rates in Africa at 6.0% but the government and BNR are keen to keep rates relatively low in order to ease private sector access to finance. As in Kenya, the central bank believes that private sector banks are not passing the benefits of low rates on to their customers.

The BNR reported: “Given the state of affairs, banks will have to intensify credit recovery efforts so as to mitigate the likely increase in non-performing loans due to high interest rates.” It added that it would help the nation’s banks to improve their underwriting and monitoring standards.

Rwandan banks collectively generated RF9.8 billion ($11.7m) in post-tax profits in the year to the end of March, while the microfinance sector recorded an additional RF937m ($1.1m). Total sector assets increased by 11.3% over the year to RF2.4 trillion ($2.9bn) in March.


The banking sector and indeed the entire economy of neighbouring Burundi have been affected by political and security instability, before and following the election of Pierre Nkurunziza as President in July 2015 for a third consecutive five-year term.

The banking sector was already one of the most limited in Africa but was hard hit by a 2.5% economic contraction in 2015. CRDB’s Burundi subsidiary recorded a profit of BF2.38bn ($1.4m) in 2016, up from a BF3.57bn ($2m) loss in 2014.

CRDB Managing Director Charles Kimei said: “The political challenges slow us from opening more branches… our expansion plans depend on the situation on the ground.” The bank hopes to generate 3–5% of its net income from its international operations.

One of the biggest challenges facing banks in the region is developing a housing finance sector that serves the population as a whole and not just the wealthy elite. In Uganda in June, House Finance Bank signed an agreement with property developer Comfort Homes Uganda to provide 80–100% mortgages for affordable housing.

The current interest rate of 17.5% a year seems high to those in most countries, while house prices are rising by about 13% a year because of the lack of low cost housing. There is currently a shortfall of 2m houses. Greater competition in the mortgage sector would certainly help to drive down interest rates.

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