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 | Tax social media at your peril

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

African countries have low tax bases not necessarily because their authorities do not desire the revenue but often due to the cost of acquiring it. With significant portions of their populations in the informal economy, there are not many options available to tax authorities to assess income. More financial inclusion should make their jobs easier over time. But what about now? The ubiquity of mobile phones, smartphones especially, and the proliferation of social media, could be a less expensive means by which to assess how much people earn. Oftentimes, it is not that citizens do not wish to pay tax. But dealing with public institutions in most African countries is not only sometimes frustrating but potentially punitive.

Authorities are better off just taxing their citizens’ consumption. Value-added tax (VAT) tends to be an effective tool in this regard. In some African countries, the telecommunication sector tends to be either exempt from VAT or allowed concessionary rates to engender digital inclusion. Considering how endeared many are to their mobile phones, any measure that makes it more expensive to use them could be politically costly, however. When Nigeria, a country where there is extreme sensitivity to any measure that could potentially stifle internet freedom, first flirted with the idea of a “communication services tax”, the uproar was deafening. But with almost $800 million in potential annual revenue, it was too tempting a proposition for the authorities. Some African authorities are not as encumbered. At least, so it seemed at first.

In March, Uganda announced a so-called social media tax. Not that the authorities did not already tax voice and data communications. But they did not tax data usage as much as they did phone calls. Planned for July, data usage on social media platforms like Facebook, Twitter, WhatsApp, Skype and Viber would be taxed more; according to the proposal then. The move was motivated in part because of the authorities’ strained finances, it seems. Volatile and hitherto low commodity prices are one of the reasons why. Burgeoning debt stocks and disproportionate portions of revenue used to service them, are another. Consequently, African tax authorities have little choice to but to seek new ways to raise more revenue.

Touching a nerve
Many African authorities have been looking to tax the purchase of data for internet use by their citizens more heavily for a while now. The potential revenue figures are eye-watering certainly. But there is another motivation, it is believed. Some African authorities, increasingly irritated by criticisms on the internet, might not mind that the social media habits of their citizens be a little bit more expensive. Take the Ugandan example; President Yoweri Museveni was not shy about his desire to make gossip via social media a very dear endeavour via the new digital taxes he mooted. Not that the authorities do not already assert some form of control over social media and other forms of internet usage. Like China, African authorities are becoming adept at switching off the internet, making it slow, or restricting its usage, during crucial politically sensitive events like elections, protests and so on.

But higher taxation on internet usage could be a more effective and less expensive way to do that for the authorities with such aims. Since if the habit weighs on the purse, people are likely to choose the words they publish on social media more carefully of their own volition. Public opinion would definitely be stifled as a result. But there is also the possiblity that the proliferation of fake news might reduce. Perhaps then, it is only a matter of time before other African countries begin to flirt with Mr Museveni’s idea. Even so, there are limits to how far the authorities can push the envelope. Because unlike the quasi-dictatorships cloaked in democratic garments in countries like Uganda and Rwanda, some African leaders, especially those with crucial elections to win, can ill-afford to alienate citizens.

Resist
Turns out Mr Museveni is not totally insensitive to public opinion: he has shelved the planned social media tax. In fact, his government now says no such proposal was ever made: “There is nothing like social media tax. There is no such proposal. That is not what the president proposed. No one will tax you for using WhatsApp and Facebook”, says Ugandan information minister Frank Tumwebaze. Is Mr Museveni’s counterpart in Tanzania, John Magufuli, who recently ordered that bloggers pay a $930 fee to legally do what is ideally free, likely to be similarly sensitive? No matter. He will fail.

macroafricaintel | Can Africa win Trump over?

By Rafiq Raji, PhD

In mid-May, at the Africa Finance Corporation’s 10th year anniversary infrastructure summit (“AFC Live 2017”) held in Abuja, I asked Jay Ireland, the president and chief executive of GE Africa – the subsidiary of the American industrial giant on the continent – about his thoughts on whether Donald Trump, the American president, would be good or bad for Africa. Specifically, I wanted to know if President Trump would be worth the trouble of winning over. As Mr Trump does not know much about Africa, if the little mention the continent got during his election campaign is anything to go by, engaging with him early on might spring pleasant surprises, some pundits argue. Despite such assurances, I remained a little sceptical. So the opportunity to ask Mr Ireland, who incidentally is also the chair of former President Barack Obama’s Advisory Council on Doing Business in Africa and co-chair of the US Africa Business Centre, which leads the American business community’s engagement activities on the continent, was huge. In a sign of the times and the peculiar style of the current American president, Mr Ireland demurred, humorously wondering if his answer might not become the “subject of a tweet.” More importantly, he said a strong case was being made to the Trump administration to continue ongoing initiatives. I was particulary interested in the “Power Africa” programme initiated during the Obama administration; especially since even during Mr Obama’s tenure, it was floundering, talk less that of Mr Trump. The African Growth and Opportunity Act (AGOA), is not as vulnerable to a Trump rethink, albeit the administration could still exercise certain prerogatives over the choice of beneficiary countries and so on. My interpretation of Mr Ireland’s comments are as follows: Should Africa indeed not be a priority for Mr Trump, ongoing African initiatives may simply continue under the aegis of able and experienced technocrats at the American State department. And in the event Mr Trump suddenly develops a keen interest on African issues, proactive engagement with the administration like his and the business people he represents may be hugely differential. It has also been argued that African heads of state should do likewise.

Focus on first-order issues
In light of the recent exit from the Paris climate accord by Mr Trump, however, some are now beginning to think whether there is a need to even try. I would not be too quick to give up. True, with African countries already beginning to see the negative effects of climate change via droughts and so on, the recent American action is a setback. And of course, African countries initially had their own reservations about the accord. Not a few wondered why they should have to be environment-friendly at the expense of their development; especially as currently developed countries were not similarly cautious. But with research showing a nexus between climate change and increasing incidents of conflict in a number of African countries, there is a growing consensus about the need to be more caring of the Earth we live in. Still, to do this, African countries would require financial and technological support. To this end, the Paris agreement makes substantial provisions. With the American exit, however, also goes its financial commitments. It is also evidence that a Trump presidency would (at least for now) have second-order negative effects for Africa when the issues relate to broader international and multilateral arrangements that Mr Trump is averse to. So it is on the more specific African initiatives that African leaders should hope to influence him on.

Show respect
At the recent G7 summit in Italy, it was all too clear Mr Trump was not enjoying himself. He was particularly irritated by Emmanuel Macron’s (the French president) “macho-diplomacy”: Mr Macron’s overly firm and lingering handshake with Mr Trump at their very first meeting since the former’s inauguration was well-reported. As if determined to rattle the American president or put him to size, Mr Macron also made sure to refer to the incident afterwards as deliberate. That and another, where Mr Macron seem to be moving towards Mr Trump to shake hands, as the G7 leaders and invited guests did their traditional group-walk in front of the press, but at almost the last minute swerved to shake that of Angela Merkel, the German chancellor, must have been a little unnerving for a man known for his fragile ego. Thus, it is very likely that unpleasant experience was at least a secondary motivation for his action on the Paris accord. In his speech announcing the decision, Mr Trump was almost certainly taking aim at Mr Macron when he said: “I was elected to represent the citizens of Pittsburgh, not Paris.” (The Washington Post did a very insightful article on the dynamics leading to Mr Trump’s decision.) At the G7 summit it turns out, one of few instances where Mr Trump seemed to be enjoying himself was when he ran into some of the African delegates: Yemi Osinbajo (Nigeria), Alpha Conde (Guinea), Uhuru Kenyatta (Kenya), Hailemariam Desalegn (Ethiopia) and Akinwumi Adesina (African Development Bank). With deft handling, Mr Trump could become an ally.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/can-africa-win-trump/

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