The Kenya Banking Sector: Current Tends and Prospects

LAGOS (Capital Markets in Africa) – Kenya’s banking sector has proven resilient over the last few years, continuing to deliver growth despite the tougher operating environment. The country has a total of 42 commercial banks, of which 11 are listed on the Nairobi Securities Exchange; with 1 mortgage finance company, 13 microfinance banks and 3 credit reference bureaus, all regulated by the Central Bank of Kenya. Financial inclusion continues to rise, reaching 75.3% in 2016 from 26.7% in 2006, mainly driven by digitization as evidenced by the increased adoption of mobile money in the economy. The increased adoption of technology to enhance banks’ efficiency, focus on alternative distribution channels and the growth of Kenya’s middle class that puts a lot of emphasis on convenience, has increased the demand for banking services in Kenya, and contributed to growth in the sector.

Some of the pertinent issues in the banking sector are highlighted below:

Asset Quality
The banking sector has experienced a deterioration in asset quality, with the gross non-performing loans (NPL) ratio for the banking sector worsening to 12.4% in April 2018, from 10.7% in December 2017. The Central Bank of Kenya (CBK) attributes the deterioration in asset quality to the effects of drought, compounded by the prolonged election period last year. In addition, the rising NPLs are due to delays in payments to suppliers by county governments, as well as the private sector, according to the latest CBK Credit Survey Report. However, banks expect the level of NPLs to decrease in

Q2’2018, and going forward, driven by a conducive business environment, as well as improved credit recovery efforts. On the other hand, there lies the possibility of repeal of the rate cap legislation, which would likely increase interest rates on loans and put more pressure on customers already struggling to service existing loans.

Interest Rate Cap Law
The interest rate cap came into law in September 2016, following the enactment of the Banking (Amendment) Act 2015, which placed a ceiling on interest rates on loans at 4.0% above the Central Bank Rate, in order to spur credit access to the private sector.

An extract from the INTO AFRICA August Edition: Driving Africa Opportunities. To read full article, please download by clicking: INTO AFRICA PUBLICATION: AUGUST 2018 EDITION.

Contributor’s Profile
Caleb Mugendi serves as Senior Investment Analyst at Cytonn Investments Management PLC. He is a graduate of the Cytonn Young Leaders Program, a prestigious hands-on training on finance and investment management. His experience ranges from specialization in fixed income analysis, currencies and the financial services industry, having focused largely on the banking sector. He has participated in the publication of several public markets reports including; Quarterly Kenya Banking Sector Reports, Half-Yearly Kenya Insurance Sector Reports, Kenya Corporate Governance Index Report, and Sub Saharan Africa Financial Services Report, among other more frequent weekly reports. He holds a Bachelor of Economics from Kenyatta University and is currently a Chartered Financial Analyst (CFA) level II candidate.