Kenyan banking industry on edge as cash reserves decrease

While American banks started collapsing when the Federal Reserve started raising rates, Kenyan lenders have mostly remained stable since the Central Bank Rate (CBR) was hiked 250 basis points over the last one year, but cracks are beginning to show.

Lenders liquidity position has dipped to 49.9 percent in the three months this year, from 50.8 percent at the end of December according to the Central Bank of Kenya (CBK) first quarter credit survey.

CBK’s Banking Supervision report also shows that commercial banks hit record high borrowing of Kes147 billion from CBK, the lender of last resort to maintain liquidity requirements taking up about Kes40 billion over the last six months of last year.

Other CBK reports also show banks are coming under liquidity pressure that may force them to turn to shareholders for support, seek state bailouts or risk collapse.

The first liquidity challenge is coming from higher interest rates as depositors search for better returns on increased CBK’s base lending rate.

Reports shows, micro lenders are already grappling with liquidity challenges suffering a loss of one billion shillings last year as depositors moved billions from their balance sheets.

Kenya’s 14 microfinance banks’ net loss jumped 77.5 percent to Kes1.3 billion as at December last year with customer deposits falling by eight percent to Kes46 billion in December 31, 2022 from Kes50.4 billion.

CBK’s Bank Supervision Annual Report 2022 says the decline in deposits was due to transfer of funds to alternative attractive investments due to the overall increase in interest rates.

The increase in Central Bank Rate has also caused another problem which is discounting the value of government securities with mark to market losses which means bank have to cut exposures to these securities or risk losing value on their most liquid assets.

Read also: Equity’s first-quarter profit up 8 percent to Sh12.8 billion

The re-profiling is already happening. Equity Bank which posted a 6.6 percent jump in quarter one profits to Kes12.3 billion saw its net loans grow 21 percent to Kes756.3 billion on increased private sector lending while the bank’s investment securities including government bonds increased marginally to Kes392.4 billion from Kes389.4 billion.

Rising Central Bank Rate means lenders’ long-dated bonds are losing market value, posing a liquidity risk to lenders and forcing them to shift to private sector lending at a time when defaults are also elevated there.

Smaller banks also face an additional threat from accumulated losses and higher level of loan defaults eating away banking capital that has seen the number of struggling lenders jump from 9 to 13 last year, facing capital adequacy challenges on losses and discounted insider loans.

Non- Performing Loans are at an industry high of 14 percent with at least 241,628 small businesses representing 20.5 percent of total MSME loan accounts either defaulted on or had to have loans valued at Kes222.5 billion restructured.

The stock of non-performing mortgages in 2022 closed at Kes37.8 billion, up 33.6 percent compared to the Kes28.3 billion reported at the dose of 2021.

As the CBR rises this year affecting the value of liquid assets like treasuries amid continued strain at the interbank, even more lenders will come under pressure posing the twin challenge of collapse and contagion.

And it is not just interest rates that is hurting lenders capital base, reorganization in government that may see all parastatals, ministries and departments move money to a single treasury account is also expected to pull away large deposits.

Lenders will have to fight for deposits or request for shareholder bailouts.

Deposits in commercial banks in Kenya crossed the Kes5 trillion driven by agency banking and mobile phone platforms according to the 2022 bank supervision report, which shows lenders fighting for deposits playing out on digital mobilisation.

Mobile phone depositors may, however, also pose a risk of faster withdrawals in the event of challenging circumstances that can accelerate panic and a run on banks.

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