KBA Says Banking Sector Strong Despite Pandemic Shocks

NAIROBI, Kenya, July 27 – A new report from the Kenya Bankers Association indicates that the country’s banking sector is strong and stable despite the impact of the coronavirus pandemic.

The Kenya Bankers Association (KBA) State of the Banking Industry (SBI) report indicates that the overall profitability of the sector and contributions to the national budget fell to a nine-year low in 2020 due to the negative impact of COVID-19 on the economy.

This is especially the case in sectors such as commerce, manufacturing and agriculture, where banks have restructured the majority of assets.

The report found that bank profits before tax fell 30.9%, the lowest level since 2012, attributable to depressed economic performance and the quality of assets held by banks during the year.

During the period, provisioning for loan losses increased by 47.5% to Kshs 198.1 billion from Kshs 134.3 billion in 2019, with loan loss housing absorbing 45.7% of outstanding loans. productive against 40.2
percent in 2019.

The average return on industry assets fell to 2%, a faster pace than the downward trends observed in recent years.

In addition, the industry’s average return on equity declined to 13.3% from an average of 21.1% recorded in 2019.

According to the KBA-SBI report, banks have pledged to support the government in its COVID economic stimulus plan with a focus on key sectors that boost production and employment, especially the commerce sector.

Compared to other sectors, the financial performance of the banking sector in 2020 saw lower total income growth as a result of rising operating costs largely due to increased expenditure on provisions for losses. on loans.

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The industry’s net interest margin also declined slightly, with the cost of financing on average remaining virtually unchanged. These developments differed according to the size of the banks.

The report also states that despite the slowdown in growth, the industry has continued to withstand market shocks resulting from the pandemic.

The KBA-SBI report indicates that the outlook for the sector for the year 2021 appears stable, supported by adequate levels of capitalization and liquidity.

The sector’s total capital adequacy ratio rose to 19% in 2020, from 18.8% in 2019, above the minimum legal requirement of 14.5%, supported by an increase in total capital which has exceeded the growth in total risk-weighted assets during the period.

KBA Managing Director Dr Habil Olaka said players in the banking sector continue to review and improve their business models, seeking to take advantage of frameworks that promise efficiency gains, especially through the adoption of technological innovations.

“Aware of the market risk, growing competition, the increasing sophistication of customer expectations, as well as the dynamism of the regulatory environment, the primary challenge for the industry is to continue to invest resources to stay at the border. while supporting economic recovery, ”Dr Olaka said.

Total banking sector assets increased by 12.4% in 2020, in Kshs. 5.4 trillion Kshs. 4,800 billion in 2019, driven by a faster expansion of non-loan assets – mainly investments in government securities – which increased by 18.5%, with gross loans and advances increasing by 6.7 %.

Net loans and advances increased 9.1% in 2020 to close at Kshs. 2.93 trillion Kshs. $ 2.63 trillion in 2019.

However, the asset mix experienced minimal changes during the year.

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At the same time, banking system deposits maintained a strong growth path, increasing 13.1% from 8.3% in 2019 to close at 4.11 billion shillings.

This reflected a reallocation of assets motivated by high uncertainty. The accumulation of deposits during the year outpaced the growth in gross lending, improving the liquidity of the banking system.

The sector’s deposit-to-liability ratio increased slightly to 88.5% in 2020, from 88.1% in 2019, indicating that the sector relies heavily on wholesale funding to reduce costs on the liability side of the balance sheet.

Kenya Bankers Association research and policy director Dr Samuel Tiriongo said analyzes of banks’ tax contribution showed the industry was contributing in Ksh. 42.4 billion in 2020 compared to 55.4 billion shillings in 2019, largely reflecting the depressing effects of the pandemic on income.

“While this represents a 23.6% drop in the tax contribution, it highlights the extent to which the sector would have contributed more to tax revenues if it had not borne most of the weight of supporting others. sectors of the economy. In fact, the industry’s implicit tax rate rose to 39.1% in 2020 from 35.7% in 2019, ” Dr Tiriongo added.

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