The journey of Kenya’s banking sector is a true reflection of the country’s changing dynamics over the past years and decades. From financing international trades and once a league of only three national banks, it gradually evolved to an industry that now facilitates traders and entrepreneurs, serving the local economy and the foreign markets. Loans are available for the household sector on a large scale with financial inclusion been rated at 75.3 percent in 2016.
The development and growth has been nothing short of phenomenal, characterized by forty one commercial banks and twelve microfinance banks that currently operate in Kenya. In fact some analysts hold the view that Kenya is overbanked. Let’s look at the factors that fueled the growth of the banking sector.
Factors that spurred the growth of banking sector
- The growth of retail industry in Kenya has been one of the primary factors that have contributed to the maturation of the banking sector.
- Devolution policies in Kenya helped the banks to expand their businesses in regions that were previously inaccessible.
- Improved sector consolidation with increased acquisition of weaker banks by local stable market players and foreign banks.
- Development in technological infrastructure that allowed banks to facilitate customers more conveniently. Examples of some advancement includes: Eazzy Banking and KCB app. This added convenience increased the demand in banking services among consumers.
This image of the country’s banking sector appears to be very positive. The road appears to be stable and the long term prospects seem even brighter.
How long can it continue?
Well, this is exactly the question that has been troubling the analysts and the observers over the last year or so. There have been recent indications that point towards a long term uncertainty and it is important that the readers know about it.
Is this another transitional period on the horizon?
We have already seen our banking sector struggle in the early 1990s and even though the industry was progressing towards stability, the passing of the Banking Amendment Act of 2016 and the growing competition from mobile banking sector, has once again generated concerns.
The banking amendment Act of 2016
To summarize it, the bill has introduced two new requirements which need to be exercised by every bank operating in Kenya:
- First is placing an interest cap on loans where banks cannot exceed the charged interest percentage by more than 4 percent to the base rate published by CBK. Since CBR is currently fixed at 10 percent, the charged interest rate cannot go beyond 14 percent.
- Secondly, the Banking Amendment Act of 2016 requires banks to establish transparency in the process of loan approval. Here, the banks need to communicate all the charges and terms to the consumers before they can submit their loan applications for processing and approval.
Among the General Public: The reaction has been very positive since the Kenyans can now access loan without having to pay exorbitant amount in interest. Moreover, the establishment of transparency would enable consumers to know what they are signing for before getting their loans approved. Currently, most banks in Kenya charge loan processing fee (which in some cases is as high as 2.5 percent of the loan amount) and withdrawal fees on savings account. The banks were not obligated to disclose these charges to the consumers. So the amendment act on whole has been well received by the general public.
Among the Banking Industry: Contrary to the above reception, the banking industry has not welcomed these measures. They believe that the capping of interest would lower their income, which forms a major portion of their revenue stream. There are also concerns that the control on interest limits may tighten even further into 2017 that can leave the banks financially exposed and even affect their non-interest income. As of now, the banks of Kenya have enough in the reserves to tackle the concerns in short term but in the long run, majority is under-resourced.
And this is where the concerns stem from..
To survive against the financial odds, the banks have only one solution in their locker and that is to improve the environment they are currently operating in. This can be achieved by:
Reducing the overhead cost, in which the employees may suffer. In fact, some banks have already cut down their staffing, which include the likes of: Equity Bank, Sidian, Family Bank, Co-Op and NIC, National Bank and Standard Chartered have made announcements that it would be firing some of their employees by closing down their regional branches in the country. More than thousand employees lost their jobs in the banking sector last year and the figures will only rise. However, it would be wrong to attribute this volatility entirely to the interest rates. As discussed above the introduction of technology has allowed banks to provide services to customers without having the need to invest on human resources.
Introduce loan rationing. After all, why would a bank loan to a consumer at an interest rate of 14 percent, who may carry high risk, when it can loan the money to government by buying Treasury Bills? On one hand they have an uncertain prospect, while on the other hand they have a borrower that guarantees the returns. The choice is obvious and it would lead to drying up of credit resources, which has been one of the driving factors behind Kenya’s improving GDP.
The growing popularity of Mobile Banking industry
If the Banking Amendment Act of 2016 provided concerns in the form of reforms and administrative restructuring, the development of mobile industry in parallel has presented banks with a challenge to upgrade their technological infrastructure.
- Services like M-Shwari has been providing market loan packages, where there is no loan fee to pay. Instead the users only have to pay a facilitation fee of 7.5 percent in order to get their loans processed. Similarly, M-Shwari also offers interest rate on savings that are far better than the market averages offered by the banks. And we are yet to talk about the convenience M-Shwari has to offer to users in terms of accessing the services.
- Then we have M-PESA which is about launch its debit card that operates on NFC technology and allow fast processing of services at POS terminals. Banks are now facing stiff competition from the new innovation devised by M-PESA. The service currently facilitates just over 20 million users in Kenya.
The banking sector have responded by introducing its own services like Eazzy Banking and KCB app but more innovative solutions need to be designed to compete with services like M-PESA and M-Shwari.
With the next elections approaching us and plenty of other happenings, there are bound to be implications on the banking sector of Kenya.
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