macroafricaintel | Banking in East Africa: Recent trends & outlook

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

What are the recent trends in the East African banking industry? And what does the future portend for the sector in the region? For perspectives on these questions, African Banker got the views of two highly-esteemed Nairobi-based banking professionals: George Mutua, managing director and chief representative officer for the Kenyan office of Societe Generale, a French bank, and Elizabeth Ndungu, head of research at Genghis Capital Investment Bank. Expectedly, Kenya, the region’s largest economy, dominates. And government policy there is perhaps the most stifling for the sector at the moment. Good news is there are indications some of the measures might be reversed. First is the capping of interest rates on commercial loans at 4 percent above the central bank rate by the Kenyan government. Another is the recently introduced 0.05 percent “Robinhood tax” on cash transfers of more than 500k shillings from 1 July; which halved daily interbank volumes in the first week alone. A proposed Financial Markets Conduct Authority in Kenya also adds to increasing concerns about over-regulation. There is probably a need for stiffer rules, though. For instance, 10 Kenyan banks are currently under investigation for accepting stolen funds. But stronger rules could be self-defeating if they end up weakening the ability of central banks to rein in erring banks. For evidence, reformist Central Bank of Kenya (CBK) governor, Patrick Njoroge, put it bluntly: “The [Financial Markets Conduct] bill emasculates the central bank”, adding the CBK “…is under attack.” Without a doubt, there is increasing political interference in the region’s central banks and indeed elsewhere on the African continent. Curiously, Tanzania’s president John Magufuli, well-known for his heavy-handedness, does not plan to bail out struggling banks in his country: “I will not give any money to failing banks,” Mr Magufuli said earlier this year in March, adding “it’s better to have a few viable banks than dozens of failing banks.” The recurring theme is clearly one where on the one hand, governments in the region are more overbearing on banks with more regulations while on the other hand, in the Tanzanian case, for instance, not so supportive of those that flounder.

Reduced profits, rising NPLs
Undoubtedly, top-of-mind amongst bankers in East Africa is the expectation that the Kenyan government would repeal the law capping interest rates. Since the legislation, credit has slowed. Mr Mutua lets in on his expectations: “We expect the interest rate caps to be repealed through an act of parliament- sometimes in 2018. This should lead to more lending by commercial banks to the SME sector. Easier access to credit will drive economic growth and should improve GDP growth.” Ordinarily, banks were increasingly loading up their books with government securities. The rate cap made doing so more a necessity than a strategy. Should the rate cap be abolished, SG’s Mutua believes “banks would invest less in government securities and more in the private sector.” The move would be beneficial for banks’ bottomlines certainly with “interest margins to increase gradually as banks take more risk and charge relatively higher margins to the private sector,” Mr Mutua adds. Genghis Capital’s Ndungu provides additional insights: “The banking industry in Kenya has experienced a challenging operating environment over the past year. This has mainly been attributed to interest rate caps introduced in the third quarter of 2016 that has seen banks record reduced profitability on account of reduced net interest income. In response to this, we have witnessed banks adjust their business models through a combination of initiatives aimed at reducing costs such as cutting down branches, laying off staff and enhancing operational efficiency, coupled with revenue diversification so as to tap into non-funded income.” On interest rate caps, Ms Ndungu’s view is thus: “While the interest rate caps have been a pain to the banking sector in Kenya, the East African region has been grappling with increasing non-performing loans (17.4% in Burundi, 12.4% in Kenya, 8.2% in Tanzania and Rwanda, 6.2% in Uganda), primarily on account of the high interest rates in neighbouring countries and inadequate risk assessment, which could affect economic growth in the region adversely. Lending rates in Uganda, Tanzania and Rwanda range between 18.0% and 21.0%, which has seen borrowers suffer the full brunt of accessing credit and led to high default rates. This in turn has stifled private sector credit growth as banks enhance risk management to curb this trend.” On NPLs, for Kenya at least, SG’s Mutua observes “no major shift in NPL levels considering that banks have been forced to clean-up their books and make provisions in good tome by the Central Bank of Kenya,” however, and expects “credit growth in agriculture, construction, manufacturing, retail/FCMG- as banks come up with a lending mandate in support of the president’s Big Four [agenda]”.

Stiffer regulation, consolidation, regional expansion & new entrants
Even as it is expected the authorities would abolish interest caps in Kenya, they would continue to rein hard on banks who charge their customers disproportionalely. SG’s Mutua believes there would be “stiffer regulation on how and what banks charge to borrowers [with] the Central Bank of Kenya [insisting]…on transparency on the type and amount of financial cost”. Another development Mr Mutua expects is “…more consolidation in the banking industry – across the industry in the region. We still have too many small banks in Kenya, Uganda, Tanzania and there’s need for consolidation. It will be pushed by both business viability needs and regulatory requirements on adequate capital levels. We see the big local banks continuing to expand and deepen their presence across the region. [And] top local banks in Kenya, Tanzania, Uganda will start looking for regional dominance.” Mr Mutua also sees “the continued adoption of mobile-money and digital solutions by banks over additional/new investments in brick and mortar network [and an] increase of the agency banking model. Furthermore, there should be “more and better market segmentation with a new emphasis on wealth management, financial planning solutions,” SG’s Mutua believes.

On the outlook for NPLs and banking in the East African region, Genghis Capital’s Ndungu says: “Going forward, we expect this trend to be managed as banks tow in line with the requirements of IFRS 9, that requires a forward looking approach in loan provisioning. This will force banks to be more prudent in their assessment and will also require fiscal consolidation (government support) in order to ensure that private sector credit growth in the region does not deteriorate as a result of the crowding out effect. With a population growth rate of 3.0%, compared to other developed countries below the 1.0% mark, coupled with increasing financial inclusion and more uptake of financial services products, the East African region offers an attractive proposition for long term investors looking to take advantage of the attractive valuations.” SG’s Mutua also sees the “entrance of new global and regional payers- the likes of JP want to establish a rep office covering East Africa in Nairobi. The replacement of Barclays by ABSA in Kenya and Tanzania. He also expects “more competition from local banks- empowered by mobile money solutions, agency banking, and digital banking- the “traditional” local banks will pose new competition to established international brands in the region.” In conclusion, Societe Generale’s Mutua sees “more and better regulation of banks in Tanzania, in terms of how they classify and provide for bad debt in their books, more focus on supporting/financing intra-Africa trade [as] banks in East Africa…target traders involved in exports and imports across Africa, better and stronger relationships with multilaterals, DFIs, insurance bodies, to put in place guarantees and de-risking solutions that will make certain sectors [like] agriculture, commodity trading more bankable.

An edited version was published in the Q3-2018 issue of African Banker magazine

Also published in my BusinessDay Nigeria newspaper column (Tuesdays)

macroafricaintel Weekly | 26 Nov

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Date Data / Event Period Forecast Previous
26 Nov Ghana Policy Rate, % 17.0 17.0
27 Nov Kenya Policy Rate, % 9.0 9.0
29 Nov South Africa PPI, % yy (mm) Oct 2018 6.0 (0.5) 6.2 (0.5)
29 Nov South Africa PSCE, % yy (mm) Oct 2018 6.2 6.3
30 Nov Kenya CPI, % yy (mm) Nov 2018 6.1 (0.3) 5.5 (-0.8)
30 Nov Uganda CPI, % yy (mm) Nov 2018 3.2 (0.1) 3.0 (-0.4)
30 Nov Zambia CPI, % yy (mm) Nov 2018 7.3 (0.5) 8.3 (0.7)

macroafricaintel | Africa FX Monthly – Oct 2018

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Currency   1 month

(31 Oct 2018)

3 month

(31 Dec 2018)

6 month

(29 Mar 2018)

12 month

(30 Sep 2019)

South African Rand (USD:ZAR) 14.3 14.1 13.5 13.3
Nigerian Naira (USD:NGN) 364.0 367.0 366.0 370.0
Ghanaian Cedi (USD:GHS) 5.0 4.8 4.9 5.1
Kenyan Shilling (USD:KES) 101.0 101.3 101.1 100.7
Ugandan Shilling (USD:UGX) 3,831.0 3,827.0 3,830.0 3,829.0
Tanzanian Shilling (USD:TZS) 2,285.0 2,289.0 2,285.0 2,281.0
Ethiopian Birr (USD:ETB) 28.1 28.3 28.5 29.0
Mauritian Rupee (USD:MUR) 34.3 34.5 34.9 35.0
Namibian Dollar (USD:NAD) 14.3 14.1 13.5 13.3
Botswanan Pula (USD:BWP) 10.5 10.3 9.9 10.1
Zambian Kwacha (USD:ZMW) 12.3 12.1 11.8 11.5
US Dollar Index (DXY) 95.0 94.5 94.7 93.5

macroafricaintel | [#StopTheKillings] Kenya – Recent banking trends & outlook (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Increasing foreign interest, hopes up for failed banks,
Regardless, Kenyan banks are looking to spread their wings. With Ethiopia beginning to open up on the back of reforms by 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; according to Reuters in July. 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 $60 million in new money from SBM Holdings, a banking group in Mauritius. The new SBM Bank Kenya Ltd would only shave off 75 percent 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 recievership 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 percent of gross loans in 2017 from 4.6 percent in 2012. In an early July research note, Moody’s, a rating agency, suggests NPLs would peak this year on the back of an improving economy and more successful loan recovery efforts. Already at 11 percent of loans in March, it could come close to 12 percent before year-end if current constraining regulations and conditions do not improve much, though. Christos Theofilou, vice president and senior analyst at Moody’s, summarizes 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 percent 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%.”

An edited version was published in the Q3 2018 issue of African Banker magazine

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. https://www.businessdayonline.com/columnist/rafiq-raji/article/stopthekillings-kenya-recent-banking-trends-outlook-2/

macroafricaintel Weekly | 24 Sep

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Date Data / Event Period Forecast Previous
27 Sep South Africa PPI, % yy (mm) Aug 2018 6.1 (0.5) 6.1 (0.6)
28 Sep South Africa M3, % yy Aug 2018 6.0 6.0
28 Sep South Africa PSCE, % yy Aug 2018 5.5 5.4
28 Sep Kenya CPI, % yy Sep 2018 5.1 (0.4) 4.0 (0.3)
28 Sep Kenya GDP, % yy Q2 2018 5.8 5.7
28 Sep Zambia CPI, % yy (mm) Sep 2018 8.2 (0.4) 8.1 (0.3)
28 Sep Uganda CPI, % yy (mm) Sep 2018 3.6 (0.7) 3.8 (0.9)

macroafricaintel | [#StopTheKillings] Kenya – Recent banking trends & outlook (1)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In July, a court temporarily suspended the implementation of a new 0.05 percent tax on bank transfers above 500,000 shillings ($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 11.2 million shillings, from 26 million shillings only the week before. Time will tell whether the reprieve would be permanent, perhaps as early as mid-September, when the suit would 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.

Stifling regulation, tense labour relations
There remains the vexing issue for Kenyan bankers of the cap on interest rates on commercial loans at 4 percentage points above the central bank rate instituted in September 2016. Indications that the law might be reversed is 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 $100 million, for instance. The bad press would certainly make it difficult for them to stop a proposed financial markets conduct authority. Currently a bill in parliament, once passed into law, the central bank’s powers to rein in erring banks would be passed to it. 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 signalling 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 jeopardize 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 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 $2 billion 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 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 are 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 percent of its almost 50 million 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 $1.5 million in bonuses alone, is hardly endearing.

An edited version was published in the Q3 2018 issue of African Banker magazine

Also published in my Businessday Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/columnist/rafiq-raji/article/stopthekillingskenya-recent-banking-trends-outlook-1/