Kenya: Small banks hang by a thread as the Big Banks swim in cash

When commercial banks recorded a profit before tax of Sh85.8 billion as of June this year, it was not party time for the entire industry players. For Jamii Bora Bank, Spire Bank, Development Bank and a host of other cash-strapped small banks, it is not just in the first half of this year that profits have eluded them. Most of these tier three banks have been having difficulties balancing their finances for the last three years now. And things can only get worse before they can get better for these banks.

This even as things have not been rosy for the entire banking sector. As evolutionist Charles Darwin would have put it, this is a classic case of the fittest (the largest banks) blooming while the unfit (the small banks) struggle. Of course, for a number of these troubled small lenders, poor corporate governance and wrong investment decisions are largely to blame for their current cash problems. Analysts have, however, cited a number of industry-wide issues, starting with the collapse of Chase Bank and the introduction of the interest rate cap in September 2016, for the small lenders’ woes.

As such, the last three years have been tough for smaller banks. Without the liberty to squeeze an extra shilling from their borrowers, mostly small and medium-sized enterprises (SMEs), and big banks refusing to do business with them, fearing another bank-run on one of the 20 or so small banks, the financial health of tier three banks has taken a serious beating. Before the rate cap came and spoilt the cash party for banks, small lenders were the risk-takers, taking on the gamble of lending to collateral-less informal traders across the country. These included small-scale farmers, barbers, hairdressers, mama mboga, jua kali artisans, or boda-boda operators. A 2019 report on the impact of interest rate controls in Kenya by the International Monetary Fund (IMF) notes that the share of bank loans to micro, small and medium-sized enterprises (SMEs) — higher risk borrowers — was significantly higher for small banks. “The overall share of banking sector loans to SMEs was about 18 per cent. However, the share for small banks (about 40 per cent) was significantly higher than that of large banks (13 per cent),” notes the […]

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