Kenya: Is too much regulation stifling growth?

In July, a court temporarily suspended the implementation of a new 0.05% tax on bank transfers above Kshs500,000 ($5,000); a victory for the Kenya Bankers Association (KBA), which took the matter to court.

Widely dubbed a ‘Robin Hood’ tax, it was introduced in the 2018-19 budget by treasury secretary Henry Rotich in June 2018. In the first week of its implementation from 1 July, interbank transfer volumes halved to Ksh11.2m from Ksh26m only the week before. Time will tell whether the reprieve will be permanent, perhaps as early as mid-September, when the suit will be formally heard. More pertinent is how this is just one of quite a number of constraints weighing on the Kenyan banking industry at this time.

There remains the vexing issue for Kenyan bankers of the cap on interest rates on commercial loans at 4% above the Central Bank rate instituted in September 2016. Indications that the law might be reversed are gratifying but increasingly frustrating with every delay. Even so, Kenyan banks have not been particularly endearing themselves to the government and wider public in some spheres. Ten of them are being investigated in the ongoing corruption probe of the pilfering of the National Youth Service to the tune of about $100m, for instance. The bad press would certainly make it difficult for them to stop a proposed Financial Markets Conduct Authority.

A bill currently in parliament, once passed into law, will allow the state to take over the central bank’s powers to rein in erring banks. The consequent duality is likely to slow the oversight process, certainly. And even as any central bank or institution would ordinarily resist any emasculation of its powers, Central Bank of Kenya governor Patrick Njoroge’s worry and view that his institution “is under attack” should be taken seriously. Besides, the Financial Markets Conduct Bill was a disappointment for bankers in other ways. After earlier signaling that the bill would include the repeal of the rate cap law, its absence in what was eventually published and the silence of the Treasury afterwards, dashed hopes in the industry.

If Reuters’ sources are right, treasury secretary Henry Rotich might not be entirely to blame. There was a worry that including the rate cap repeal in the bill might jeopardise its passing. Why? The rate cap law emanated from the legislature, not the executive. And a lot of lawmakers, those from the ruling Jubilee Party at least, remain fervently opposed to any attempt to repeal it. Suggestions about a compromise range from increasing the cap to allowing banks to charge differential interest rates depending on the customer segment. Some banks have chosen to play the waiting game. At an investor briefing in March, James Mwangi, chief executive of Equity Group, Kenya’s largest bank by value, says his bank has more than $2bn available for lending in the event the rate cap is abolished: “There are no trade-offs because it’s not about us, it’s about the market”, he added for good measure. Other banks might be more accommodating if the cap is raised, though.

Labour relations have also been tense lately. Most recently, the sector’s union attempted to block the payment of bonuses to more than 2,000 managers at KCB Group, the largest bank in Kenya by assets. Their argument was that the quite testing quarterly reviews, the basis upon which the bonuses are paid, are discriminatory. A court ruled otherwise in about mid-April. Even so, it highlights how global pushback against what is widely considered to be disproportionately high remuneration for bankers despite their many misdemeanours, is closer to home in the Kenyan case. In a country where about 40% of its almost 50m population live below the poverty line and at a time when a multitude of depositors are still scrambling for their money in at least three failed banks, a bank chief executive earning $1.5m in bonuses alone, is hardly endearing.

Increasing foreign interest

Regardless, Kenyan banks are looking to spread their wings. With Ethiopia beginning to open up on the back of reforms by the youthful Prime Minister Abiy Ahmed, for instance, KCB plans to join forces with a bank there to exploit opportunities in a market with a population twice that of Kenya. KCB could instead choose to expand its current representative office into a bigger standalone business, however. In another vein, Stanbic Bank has gone into partnership with the Industrial and Commercial Bank of China (ICBC) to offer credit card services to what could be as many as 60,000 Chinese visitors this year.

Another foreign bank with designs on Kenya is JP Morgan, an American bank. Also, struggling Chase Bank, in receivership for a little over two years now, is getting $60m in new money from SBM Holdings, a banking group in Mauritius. The new SBM Bank Kenya Ltd would only shave off 75% of Chase Bank’s assets and liabilities, however. SBM is also invested in Fidelity Commercial Bank, which it bought in May 2017.

Imperial Bank, another failed bank, may also be out of the doldrums soon, as Diamond Trust Bank (DTB) is set to acquire its ‘good’ assets. Dubai Bank, the third bank put in receivership in the wake of revelations about fraud, under-reporting of loans, and myriad malpractices, was not so lucky, having been liquidated instead. Furthermore, as part of a broader privatisation programme, which would see the sale of at least 23 parastatals, the Kenyan government plans to sell its controlling stakes in Consolidated Bank, National Bank and Development Bank to private investors.

NPLs to peak

Non-performing loans have been ascendant, rising to 10.1% of gross loans in 2017 from 4.6% in 2012. In an early July research note, Moody’s, a rating agency, suggests NPLs will peak this year on the back of an improving economy and more successful loan recovery efforts. Already at 11% of loans in March, it could come close to 12% before year-end if current constraining regulations and conditions do not improve much, though.

Christos Theofilou, vice president and senior analyst at Moody’s, summarises the situation as follows: “Operating conditions are improving in Kenya, with real GDP growth forecast to rise to 5.6% this year as business confidence returns and agriculture recovers following last year’s drought. [Thus] we expect credit growth to also rebound, but remain low due to tighter bank lending criteria.”

Moody’s optimism is underpinned by improving infrastructure, a budding oil and gas industry, a youthful population bulge, and fintech. Still, it sees private sector credit growth remaining below 5% in 2018. A major reason is the constraining lending rate cap, which has inadvertently led to a greater shift by banks towards government securities, and a further crowding out of the private sector.

In any case, there is probably a conflict of interest for the government in regard of the interest rate cap law. While on the face of it, the authorities’ aim is to make credit cheaper and more accessible, a needy government seems to be the ultimate beneficiary, as banks empty their risk buckets in its favour. Little wonder, Kenyan banks remain quite profitable. And if Moody’s view is on the money, they are likely to remain so; maintaining “an average return on assets close to 3.2%”.