The banking industry in Kenya remained stable despite having been hit by the effects of the coronavirus pandemic.
According to the Kenya Bankers Association (KBA), the overall profitability and contributions to the national budget declined to a nine-year low in 2020 after COVID-19 ravaged trade, manufacturing and agriculture sectors where banks have restructured a majority of assets.
KBA’s state of the banking industry report 2021, shows that banks’ profits before tax dropped by 30.9 percent, the lowest level since 2012.
The report attributes the decline to a depressed economic performance and quality of assets held by banks.
In the period under review, provisioning for loan losses increased by 47.5 percent to 198 billion shillings.
In his remarks during the report’s release on Tuesday, KBA CEO Dr. Habil Olaka said the banking sector players continue to review and enhance their business models, seeking to leverage on frameworks that promise efficiency gains.
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“Cognizant of market risk, growing competition, increasing sophistication of customer expectations, as well as the dynamism in the regulatory environment, the overarching challenge for the industry is to continue investing resources towards remaining at the frontier while underpinning economic recovery,” said Dr. Olaka.
The banking sector’s total assets expanded by 12.4 percent in 2020, to Ksh. 5.4 trillion from Ksh.4.8 trillion in 2019, driven by a faster expansion in non-loan assets – mainly investments in government securities – which grew by 18.5 percent as gross loans and advances rose by 6.7 percent.
Net loans and advances increased by 9.1 percent in 2020 to close at Ksh.2.93 trillion from Ksh.2.63 trillion in 2019. However, the asset composition saw minimal changes in the year.
Meanwhile, the banking system’s deposits maintained a strong growth trajectory, expanding by 13.1 percent up from 8.3 percent in 2019 to close at Ksh.4.11 trillion.
This was reflective of asset reallocation driven by high uncertainty. The buildup of deposits during the year outpaced gross loans growth, enhancing liquidity in the banking system.
The industry’s deposit-to-liability ratio rose marginally to 88.5 percent in 2020 from 88.1 percent in 2019, indicating the sector’s strong reliance on wholesale funding to cut costs on the liability side of the balance sheet.
Kenya Bankers Association Research and Policy Director Dr. Samuel Tiriongo said analyses of banks’ tax contribution showed the industry contributed Ksh.42.4 billion in 2020 down from Ksh.55.4 billion in 2019, largely reflecting the depressing effects of the pandemic on incomes.
“While this represents a 23.6 percent drop in the tax contribution, it highlights the extent to which the sector would have contributed more to tax revenue had it not borne most of the weight of supporting other sectors of the economy. In fact, the implicit tax rate of the industry rose to 39.1 percent in 2020 from 35.7 percent in 2019,”said Dr. Tiriongo.
At the close of the year 2020, banks had collectively raised about Ksh.1.7 billion for the COVID-19 Emergency Response Fund, an intervention without which many hospitals and health workers would have been in dire need.
