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 | Uganda – Recent banking trends & outlook

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

“Financial sector stability: managing risk in a growing and fast changing environment”: This was the theme at this year’s annual conference of the Uganda Bankers’ Association (UBA) held in mid-July. Considering only last year, the conference’s theme was “the future of banking”, the current cautious drift is a significant shift. This is not to suggest that there is that much to worry about. After all, as recently as about mid-July, in an interview with Bloomberg, Bank of Uganda (BoU) deputy governor Louis Kasekende assessed that “most banks [in Uganda] are meeting their capital requirements and non-performing loans as a percentage of total credit has improved to about 5 percent.” And “chances are that [the BoU] might have to revise [its] stance on monetary policy,” Mr Kasekende adds. Inflation rose most recently to 2.2 percent in June from 1.7 percent a month earlier. Relative to a 2017-high of more than 7 percent in May, this is still quite low. So the BoU would be justified in easing monetary policy further; after keeping its benchmark rate steady at 9 percent in June 2018; albeit it cut interest rates by 50 basis points to 9 percent in February.

Stronger supervision required
Fears about bank failures and the central bank’s seeming preferred approach of liquidation remain rife. In this regard, BoU governor Emmanuel Tumusiime-Mutebile remarked at the UBA conference thus: “Most of the banks, which have failed in Uganda during the past 20 years, either had very little franchise value or were too heavily insolvent to be sold on a going concern basis or merged with another bank”. Memories are still fresh about the defunct Crane Bank, which was taken over by the BoU in October 2016. Hitherto, it was Uganda’s third largest local bank, and according to the IMF, accounted for about 10 percent of private sector lending and total banking system assets in the country. Had there been stronger supervision by the BoU, the IMF believes the bank’s liquidation, and those of four others since 2010, could have been prevented.

Credit extension to improve, NPLs lower
According to the World Bank, domestic credit growth was about 3.5 percent in the first eight months of the 2017/18 fiscal year; a deceleration from 8.5 percent during the same period the year before. The World Bank estimates FY 2017/18 credit growth should be about 13.4 percent, however. If the forecast materialises, it would be a significant improvement from 2.6 percent in 2016/17. Even so, it would be far below potential. As recently as 2014/15, domestic credit growth was 32 percent. For credit to the private sector, growth was about 5.5 percent in the first 8 months of 2017/18; little changed from the 5.7 percent recorded for the full year in 2016/17. The World Bank estimates, however, that private sector credit growth in FY 2017/18 should more than double the previous year’s at 12.5 percent. That said, commercial loans remain quite expensive to acquire. That is even as the average lending rate decreased to 21 percent from closer to 25 percent over the past two years; no doubt incentivized in part by monetary policy easing by the BoU. With deposit rates also declining to about 3 percent in February from about 5 percent two years ago, net interest margins remain high. Overhead costs account for a great deal of the margins, says the World Bank; perhaps the second highest in East Africa (ex-Rwanda). This is one of the key reasons why interest rates remain sticky at currently still high levels. Due diligence costs a great deal as well.

Thankfully, there have been fewer problematic loans lately. Non-performing loans to gross loans stood at 5.6 percent in December 2017. Only six months earlier, they were adjudged to be about 6.2 percent. And just a year before, NPLs were 8.3 percent of gross loans. The level could be better, still. In 2015, NPLs were just 4 percent of total loans. As headwinds weighing on sectors like agriculture, construction, trade and commerce, where the IMF found NPLs to be concentrated a year ago, are beginning to abate, the outlook suggests there should be fewer problem loans; over the next year, at least. Relative peace is returning to South Sudan, a key trading partner. An ambitious infrastructure programme should also boost construction. Justifiably, the BoU assesses Ugandan banks to be safe and sound; having also all met the minimum core capital requirement of 8 percent of risk weighted assets (end-June 2017).

There are concerns about government interference at the BoU, however. Stakeholders have also called for a cultural shift in the industry where instead of focusing on how to ensure the business of the borrower succeeds, bankers’ primary interest is the collateral. Perhaps, a wider adoption of agency banking and the use of alternative data in the assessment of creditworthiness would reduce how much it costs banks to service customers, some suggest. With cost-to-income ratios of over 70 percent, Ugandan banks could use all the creative ideas they can get. One idea mooted by the World Bank to improve and reduce the cost of credit extension is for the authorities to enhance “the coverage of the credit reporting system through credit bureaus”, which only covers 6 percent of the population currently; a far cry from 30 percent in Kenya and 20 percent in Rwanda. In any case, progress is being made in the adoption of alternative financial services like Islamic banking and cheaper and more inclusive channels like mobile money. In regard of the former, regulations were approved by the government in February. Thus, Ugandan banks would be able to provide Islamic banking services soon. And for the latter; 51 percent of Uganda’s adult population now own a mobile money account from 35 percent in 2014; a win for financial inclusion. But the introduction of a tax of 0.5 percent on mobile money transactions in early July, albeit reduced from 1 percent when it was first announced, could erode further progress in this regard.

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

macroafricaintel Weekly | 1 Oct

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Date Data / Event Period Forecast Previous
4 Oct Uganda Policy Rate, % 9.0 9.0
5 Oct South Africa FX Reserves, $bn Sep 2018 49.7 49.9
Seychelles CPI, % yy (mm) Sep 2018 3.0 (-0.1) 2.8 (-0.2)
Tanzania CPI, % yy (mm) Sep 2018 3.1 (-0.1) 3.3 (-0.4)
Botswana CPI, % yy (mm) Sep 2018 3.0 (0.1) 3.0 (0.0)
Namibia CPI, % yy (mm) Sep 2018 4.3 (0.3) 4.4 (0.0)
Nigeria CPI, % yy (mm) Sep 2018 11.5 (1.1) 11.2 (1.1)
Ghana CPI, % yy (mm) Sep 2018 10.3 (0.4) 9.9 (0.0)
South Africa CPI, % yy (mm) Sep 2018 4.8 (0.4) 4.9 (-0.1)
Mauritius CPI, % yy (mm) Sep 2018 1.4 (-0.4) 0.9 (-0.4)

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 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)