Kenya’s banks are well capitalised and liquid, but if they do not overcome their aversion to risk businesses will be starved of the credit neeeded to recover from Covid-19. Tom Collins reports
Business owners looking for a bank loan in Kenya during the Covid-19 pandemic may struggle to access credit as more than 40 lenders in the local market seek to conserve capital to withstand the global economic shock.
While hospitality, tourism and manufacturing look to stage a rebound following the recent easing of restrictions by the government, the banks need to find a way to support Kenya’s tentative economic recovery.
Despite regulatory changes by the Central Bank of Kenya (CBK) to encourage lending, the industry remains cautious following a 7.7% drop in profits before tax in the first quarter of this year and a rise in non-performing loans from 12.5% to 13.1% – the highest since August 2007.
CBK governor Patrick Njoroge warned in May that almost 75% of SMEs may fail to reopen following Covid-19’s impact on personal and corporate finances.
However, many lenders in the Kenyan marketplace are well capitalised and hold sufficient liquidity meaning they should be able to lend to businesses, even if demand for credit has fallen.
“The liquidity that the banks are holding is because they are not lending, the asset book is not growing,” says George Bodo, CEO at Callstreet Research and Analytics. “They are taking deposits, but they are not deploying them.” Stable but uncertain
Several factors contribute to the relative strength of the banking industry in East Africa’s largest economy during a period which has otherwise seen widespread bankruptcies in sectors ranging from aviation to hospitality.
Last November’s removal of a controversial lending cap on interest rates to the private sector – a cap restricting interest rates to no more than 4% above the base rate set by the CBK – allowed banks to grow commercial loan books in the months leading up to the outbreak of the virus.
“If we look at the interest capping, most banks were not able to effectively price risk,” says Habil Olaka, CEO of the Kenya Bankers Association (KBA), an industry body. “They were not lending to the private sector. The fallback was to allocate resources into treasury bills and government securities. When the cap was lifted they began lending to the private sector, so they are now fairly well liquid.”
In March, the CBK again intervened to support the banking […]