Business owners looking for a bank loan in Kenya during the Covid-19 pandemic may struggle to access credit as more than 40 lenders in the local market seek to conserve capital to withstand the global economic shock.
While hospitality, tourism and manufacturing look to stage a rebound following the recent easing of restrictions by the government, the banks need to find a way to support Kenya’s tentative economic recovery.
Despite regulatory changes by the Central Bank of Kenya (CBK) to encourage lending, the industry remains cautious following a 7.7% drop in profits before tax in the first quarter of this year and a rise in non-performing loans from 12.5% to 13.1% – the highest since August 2007.
CBK governor Patrick Njoroge warned in May that almost 75% of SMEs may fail to reopen following Covid-19’s impact on personal and corporate finances.
However, many lenders in the Kenyan marketplace are well capitalised and hold sufficient liquidity meaning they should be able to lend to businesses, even if demand for credit has fallen.
“The liquidity that the banks are holding is because they are not lending, the asset book is not growing,” says George Bodo, CEO at Callstreet Research and Analytics. “They are taking deposits, but they are not deploying them.”
Stable but uncertain
Several factors contribute to the relative strength of the banking industry in East Africa’s largest economy during a period which has otherwise seen widespread bankruptcies in sectors ranging from aviation to hospitality.
Last November’s removal of a controversial lending cap on interest rates to the private sector – a cap restricting interest rates to no more than 4% above the base rate set by the CBK – allowed banks to grow commercial loan books in the months leading up to the outbreak of the virus.
“If we look at the interest capping, most banks were not able to effectively price risk,” says Habil Olaka, CEO of the Kenya Bankers Association (KBA), an industry body. “They were not lending to the private sector. The fallback was to allocate resources into treasury bills and government securities. When the cap was lifted they began lending to the private sector, so they are now fairly well liquid.”
In March, the CBK again intervened to support the banking industry as the pandemic took hold by reducing the cash reserve ratio – the minimum amount a bank must hold in reserves – from 5.25% to 4.25%.
This released around $261m in liquidity for commercial banks, allowing them to cover some of the extra costs incurred by Covid-19. Indeed, despite healthy reserves many banks have seen income streams and monthly earnings greatly diminished.
Together with the CBK, banks agreed to provide credit holidays for personal loans and discuss moratoriums with businesses shortly after the first coronavirus case was announced in Kenya in March. In order to encourage cashless transactions as a means to limit the spread of the virus, the CBK announced that there would be no charges on mobile transactions below KSh1,000 ($10) and the transaction limit would be raised to KSh150,000 ($1,500).
The move has weighed on income, though the CBK agreed not to recognise loan holidays as non-performing loans in order to avoid imposing punitive regulatory fees. Equity Bank and Standard Chartered (Kenya) were the first top lenders to announce a drop in earnings for the first three months of the year, by 14% and 16.6% respectively.
“The global Covid-19 pandemic has mutated into a global economic crisis, occasioned by a sudden standstill in economic activity as a result of the global lockdown,” says James Mwangi, CEO of Equity Group Holdings, the parent group of Equity Bank. “This has introduced unprecedented uncertainty within the global financial systems, prompting us to adopt a conservative approach fortifying our balance sheet and assuring ample liquidity to support our customers.”
While most banks are still in a healthy position, the ongoing uncertainties may lead to industry casualties if Covid-19 causes further disruption to travel and trade.
“When you drill down to specific institutions you may find some which are operating on the threshold from the liquidity and capitalisation point of view,” says KBA’s Olaka. “There are those that may be at risk, especially if the pandemic extends much longer.”
Early signs of distress include NCBA, Kenya’s third largest bank by assets following last year’s merger between two mid-sized banks, which has closed 14 of its branches citing Covid-19.
Equity Group Holdings has also backed out of a deal to acquire Atlas Mara subsidiaries in Rwanda, Tanzania, Mozambique and Zambia, although its enthusiasm may already have been cooling prior to the pandemic. The halt in negotiations “was largely motivated by a change in EGH’s strategy in view of the effects of the Covid-19 pandemic worldwide and on the economies in which EGH entities operate,” Atlas Mara said in a statement.
Many banks have decided to retract dividends announced at the start of the year or ask shareholders for more capital if possible, says Callstreet’s Bodo, who predicts non-performing loans could rise by up to 20% by the end of the year.
“While the capitalisation looks good on paper, I would prefer the CBK to do a stress test on the banks and see who can withstand extreme shock. For now, you can’t tell what is happening. If Covid-19 continues, I wouldn’t be surprised if some of the smaller entities went bust.”
After three high-profile banks and a supermarket filed for bankruptcy in recent years, consumer confidence in financial institutions remains low, posing a risk to the industry.
A mid-level manager at United Bank of Africa (UBA) told African Business on condition of anonymity that he had received numerous calls asking about the health of the economy, the strength of local banks and whether or not to withdraw deposits.
To safeguard against customer losses, the Kenya Deposit Insurance Corporation recently increased the percentage of deposits it will pay to depositors in the event of a bank’s failure.
The worry for Kenya is that risk-averse banks warding against future financial disruption will be unable to support economic recovery.
The industry has previously been accused of playing it safe by investing in low-risk assets. According to a recent survey by the CBK, 64% of commercial banks expect high to moderate credit growth in July to August, driven by improved economic activity, compared to 64% of banks which expected the demand for credit in May to June to be either low or very low. This suggests that chief executives and senior officers may be more inclined to lend during the coming months.
However, KBA’s Olaka believes that reckless lending may create a financial crisis with “a much higher cost” than the health crisis. Both the government and the banks must share the burden of revamping the economy, he says.
For its part, the CBK has introduced a government guarantee scheme to back commercial credit.
“The government is coming up with a risk-sharing framework with the banks, which will hopefully allow lending to heavily impacted SMEs that will otherwise not be able to access credit,” says Olaka. “However, the amount is only $28m. Even if it were leveraged three times over that would only be a drop in the ocean for SMEs. It’s far less than what they require to survive this particular period.”