Nairobi — US-based global integrated risk assessment firm, Moody’s has predicted the possibility of more merges of small Kenyan banks which it says faces continued solvency and liquidity challenges.
In its report, the rating agency noted that the government’s capacity of providing support to failing banks is deteriorating compared to the high chances of providing support to large banks.
"Some smaller banks face higher profitability, solvency and liquidity challenges and this is likely to prompt further merger and acquisition activity ahead. The government’s capacity to provide support is deteriorating. We continue to assume a high probability of government support for the deposits of the country’s largest banks," the report noted.
The Central Bank of Kenya has approved 14 bank merges since 2000 mainly attributed to the need to meet the increased levels of share capital, expand the distribution network and market share, and benefit from best global practices.
For the year ended December 31, 2020, there were 21 small banks with a combined market share of 8.24 percent, nine large banks with a combined market share of 74.55 percent, and 9 medium banks with a combined market share of 17.21 percent.
Kenyan commercial banks are classified into large, medium, and small banks using a weighted composite index comprising net assets, customer deposits, capital and reserves, number of deposit accounts, and number of loan accounts.
Small banks are those with an index of less than 1 percent, large ones are those with an index of 5 percent and above while medium ones have indexes between 1 percent and 5 percent.
Overall, the rating agency assigned Kenya’s banking system a stable outlook on a recovering economy which it said will enable banks’ loan quality and profitability to rebound from weakened levels.
It noted that a solid Core Tier 1 capital for the Kenyan banking sector will allow the institutions to grow and finance new lending opportunities in Kenya and the region in the next couple of years
The Core Tier capital stood at a solid 16.3 percent of risk-weighted assets as of August 2021.
"Total capital to assets is also high in the system at 14.4percent, although some smaller banks have weaker capital levels with five small banks and one mid-sized bank in breach of minimum capital adequacy requirements in 2020," the report noted.