Mid-tier banks in Kenya are turning to their stakeholders for vital support as the Shilling’s fluctuations drive operational costs to new heights, resulting in an uptick in loan defaults, largely attributed to high interest rates.
One notable example is Family Bank, which recently unveiled a strategic capital-raising initiative. As part of a comprehensive $100 million (Kes14.7 billion) expansion scheme aimed at ascending to tier I status, the bank is issuing an additional 800 million shares and mobilizing funds through a rights issue.
In parallel, Victoria Commercial Bank (VCB) has made its intentions clear, announcing its quest to raise an additional Kes1.5 billion in tier-one capital before the year’s end. This move is geared towards fortifying its financial ratios in alignment with its expanded lending activities.
Additionally, Credit Bank PLC has charted a distinctive course, declaring its intent to debut on the Nairobi Securities Exchange (NSE) by the close of 2023. Their objective is to secure a minimum of Kes1 billion from the public through this listing.
Small lenders face liquidity challenges
Notably, smaller-tier banks face liquidity challenges in the current market dynamics. They are grappling with restricted access to funds due to escalating interest rates and the selective lending practices of larger financial institutions.
Consequently, these smaller lenders find themselves compelled to seek financial support from regulatory bodies or raise capital from their existing and prospective shareholders, as evidenced by Credit Bank, which appears to leverage its first-mover advantage.
In May 2022, the Central Bank of Kenya conducted a comprehensive stress test. Its purpose was to assess the resilience of banks in a hypothetical scenario where the impacts of Covid-19 were more severe, accompanied by stringent lockdown measures and exacerbated by a drought. The findings revealed that approximately 10 banks would face significant challenges and would require Kes9.3 billion to bolster their core capital.
The regulator acknowledged that in a severe case scenario characterized by stringent lending criteria, agricultural disruption due to a severe drought, stringent COVID-19 restrictions, global policy rate hikes, and increased turmoil stemming from the Russia-Ukraine conflict and associated sanctions, borrowers could encounter difficulties servicing existing loans or acquiring new ones. Consequently, such a scenario could result in an elevated credit risk.
Cost of financing
As the Covid-19 pandemic receded, a confluence of other risks has materialized, most notably, a surge in default rates that now stand at Kes586.2 billion, representing 14.7 percent of the total issued loans. This development has necessitated substantial provisions by banks, significantly impacting their profitability.
Simultaneously, a precipitous depreciation of the shilling, plummeting nearly 20 percent to 147.9 against the dollar, has amplified the cost of financing and other services procured in foreign currencies. In light of these challenges, banks find themselves in need of financial support from their ownership stakeholders.
Deepak Dave, the founder of Riverside Capital, astutely noted, “Yes that is the most likely alongside the current environment which is proving those tests true with the increased write-offs and the dropping shilling which makes a lot of operational costs higher such as licenses for software.”