Kenya’s financial sector remains well-capitalized besides the headwinds caused by the Covid-19 pandemic straining their income and loan growth.
The Kenya Bankers Association (KBA), the umbrella body of the institutions licenced and regulated by the Central Bank of Kenya (CBK), in its survey ‘Spillovers and Feedback Loops: The Banking Industry’s Response Scenarios to the Effects of COVID-19 Pandemic’, close to 94 percent of banks expect a significantly slowed economic growth, which will in turn negatively affect customers both at household and commercial levels.
Banks forecast effects ranging from Moderate (44 percent), High (35 percent) to Very High (15 percent), a situation that underpins banks’ revision of their business growth projections.
Out of the banks surveyed, 65 percent expect non-performing loans (NPLs) to increase to 14 percent from the current level of NPLs to gross loans of 12.4 percent.
Dr. Olaka observed that the reduction of the Cash Reserve Ratio (CRR) has substantially supported the loan restructuring process.
However, only 28 percent of local banks are willing to take up new risks, while 72 percent are unwilling, pointing to
low absorption of credit.
The sector has reassured the SME sector that it would not be left out even after the Kenya Private Sector Alliance (Kepsa) survey showed that 52 percent of micro and 58 percent of small enterprises have reported laying off workers.
“If the SME is already a member of the bank, this is a clear candidate for loan restructuring. You can have a moratorium of up to 12 months,” said Olaka.
KBA Chief Executive Officer Dr. Habil Olaka indicated that a financial crisis in Kenya is unlikely due to the fact that the majority of banks had high levels of liquidity during the rate cap period, which effectively lifted at the end of 2019 with banks increasing their lending activity just two months before the pandemic.
“We anticipate the banking industry will remain sufficiently capitalized even under extreme stress. The capital adequacy will remain well above the regulatory requirements.
That means, therefore, that banks are at a strong position to support businesses navigate the adversities associated with COVID-19 without risking systemic stability.
That support is already evident,’’ said Dr. Olaka.
From a finance perspective, supply-side expectations of the negative sector effects have been confirmed by demand-side surveys by agencies such as the Kenya National Chamber of Commerce and Industry and the Architectural Association of Kenya.
“Given the inherent link between the economy’s performance and that of the banking industry, and the financial sector as a whole, the effects of the pandemic are already evident. With the effect of the pandemic running both ways, the feedback loop of the economic performance is filtering to the financial sector and vice versa.
This will inevitably lead to responses that seek to promote market stability, with continued support of businesses and households,’’ said KBA Research and Policy Director Mr. Jared Osoro.