Seven of Kenya’s top banks tapped into Sh32.3 billion worth of capital reserves to absorb the impact of mounting loan defaults and report robust earnings in the nine months ended September, the latest industry analysis shows.
The move followed January’s coming into force of the more conservative international accounting standards IFRS9, which require banks to provide for expected loan losses rather than those already incurred.
IFRS9 supplanted the previous dual accounting process that allowed banks to accumulate large statutory loan loss reserves, which they have been using to meet the higher provisioning requirement for non-performing loans.
Banks have had the option of gauging provisions for their bad debt using either Central Bank of Kenya (CBK) prudential guidelines or international accounting standards. If the latter showed a bigger number, a bank could simply take the hit on its profit and loss account without increasing its loan loss reserves.
Conversely, if the CBK process produced a larger sum, a bank could provide for the lower number and book the difference in its loan loss reserve.
But with the introduction of IFRS9, banks have responded by spending most of their loan loss reserves to reduce their provisions and ultimately boost the bottom-line.
“The initial impact of IFRS9 implementation from January 2018 was in capital as the increase in impairment charges would have been too significant to pass through income statement,” a banking sector analyst told the Business Daily.
“It is very obvious that most of Tier I banks have deviated significantly from CBK guidelines, which resulted in a big hit on capital, while significantly reducing impairment charges on the profit and loss accounts.”
Going forward, banks will take most of the hit in their profit and loss accounts, lowering the profits of those with relatively riskier loan books.
“You would certainly expect the impact of IFRS9 to go through profit and loss accounts from next year,” said Habil Olaka, the chief executive of Kenya Bankers Association (KBA).
An analysis of the banking industry’s performance shows that KCB released the largest amount of loan loss reserves of Sh12.4 billion, sparing its income statement, which showed a 19.6 per cent net profit jump to Sh18 billion in the nine months ended September.
KCB’s provision for bad debt fell 42.6 per cent to Sh1.7 billion even as gross defaults remained flat at Sh34.7 billion. Other banks also lowered their provisions.
Equity, whose net profit rose 7.6 per cent to Sh15.7 billion in the same period, saw its reserves drop by Sh10.2 billion. The lender’s provisioning for bad loans dropped to Sh1.3 billion from Sh2.8 billion despite gross non-performing loans rising to Sh26.4 billion from Sh20.6 billion in a similar period a year earlier.
Co-op Bank, Barclays and Stanbic reserves dropped by Sh3.5 billion, Sh1.7 billion and Sh1.6 billion respectively, while their net earnings jumped 8.1 per cent, two per cent, and 46.7 per cent to Sh10.3 billion, Sh5.4 billion and Sh4.7 billion.
DTB and Standard Chartered Bank (Kenya) also took capital hits of Sh1.4 billion and Sh1.2 billion respectively. Their net earnings rose 10.7 per cent and 33.8 per cent to Sh5.2 billion and Sh6.3 billion respectively.
“These amounts (capital eroded) are deemed to have led to lower impairment charges in the first year of IFRS9 adoption, driving up profitability and reducing capital reserves,” the analyst said.
The new accounting standard requires provisions to be made based on factors such as a bleaker outlook for a borrower’s industry even if the customer himself has not defaulted, a move meant to make banks more conservative in their lending in the wake of the 2008 global financial crisis.
The IFRS9 adds another major challenge to banks that has seen lending margins drop significantly following the introduction of interest rate controls.
Analysts said the twin challenge of more stringent accounting rules and narrower lending margins will force banks to retain more of the profit, and reduce the cash available for distribution to shareholders.
Those that choose to raise their dividends risk tapping their shareholders for new capital in the coming years, re-introducing a wave of rights issues that has waned at the Nairobi bourse.
World Bank pushes G-20 to extend debt relief to 2021
World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.
“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.
He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.
The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.
People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.
For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.
Debt burdens, already unsustainable for many countries, are rising to crisis levels.
“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.
Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans
The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.
“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”
According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.
Tighter Reins on Platforms for Mobile Loans
The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.
Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.
Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.
Scope Markets Kenya customers to have instant access to global financial markets
NAIROBI, Kenya, Jul 20 – Clients trading through the Scope Markets Kenya trading platform will get instant access to global financial markets and wider investment options.
This follows the launch of a new Scope Markets app, available on both the Google PlayStore and IOS Apple Store.
The Scope Markets app offers clients over 500 investment opportunities across global financial markets.
The Scope Markets app has a brand new user interface that is very user friendly, following feedback from customers.
The application offers real-time quotes; newsfeeds; research facilities, and a chat feature which enables a customer to make direct contact with the Customer Service Team during trading days (Monday to Friday).
The platform also offers an enhanced client interface including catering for those who trade at night.
The client will get instant access to several asset classes in the global financial markets including; Single Stocks CFDs (US, UK, EU) such as Facebook, Amazon, Apple, Netflix and Google, BP, Carrefour; Indices (Nasdaq, FTSE UK), Metals (Gold, Silver); Currencies (60+ Pairs), Commodities (Oil, Natural Gas).
The launch is part of Scope Markets Kenya strategy of enriching the customer experience while offering clients access to global trading opportunities.
Scope Markets Kenya CEO, Kevin Ng’ang’a observed, “the Sope Markets app is very easy to use especially when executing trades. Customers are at the heart of everything we do. We designed the Scope Markets app with the customer experience in mind as we seek to respond to feedback from our customers.”
He added that enhancing the client experience builds upon the robust trading platform, Meta Trader 5, unveiled in 2019, enabling Scope Markets Kenya to broaden the asset classes available on the trading platform.