Banking industry on a strong footing despite lending woes

The banking industry maintained an impressive growth trajectory over the past three years, navigating a market environment characterised by constrained credit to the private sector, especially Micro Small and Medium Enterprises (MSMEs).

According to a newly-published report by the Kenya Bankers Association (KBA), the introduction of interest rate caps prompted adjustments that have seen banks shift from segments considered riskier and investments that balance returns and asset quality. This has led institutions to shift resources to low and risk-free assets.

The State of the Banking Industry Report, whose key findings are underpinned by an assessment that goes as far back as 15 years, seeks to contribute towards the understanding of the banking industry in a comprehensive manner that also addresses the various stakeholders in the banking sector. The report analyses various aspects of the market including policy, regulatory, business environment and stakeholder expectations, recognising the extent to which they are linked.

Speaking during an event organized to unveil the report, KBA Chief Executive Officer Dr Habil Olaka noted that investments in financial resources, personnel and technology are expected to drive banks compliance with regulations. Compliance areas range from capital, corporate governance, disclosures, and Anti Money Laundering and Countering Terrorist Financing (AMLCFT).

Dr Olaka noted that market distortions that have led finance institutions to shift their resource allocation from Small and Medium Enterprises need to be addressed, given that the SME sector is critical for sustained economic growth.

“As an industry, we firmly believe that a risk-based pricing framework is one of the ways that will support the resolving credit constraints that the capped credit pricing has imposed. As we work with various stakeholders in the public and private sector to come up with a framework that will enhance access to credit for all sectors of the economy, we hope that the capping law will be reviewed to enable the economy to accrue the benefits of a vibrant banking industry”, he observed.

According to the report, there has been a persistent build-up of non-performing loans over the past five years. The trend, notes the report, shaped the performance of banks credit in the sense that it influenced the banking industry’s risk perception.

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“The industry’s performance in 2018 shows a delicate balance between careful asset growth amidst returns-risks trade-offs and cost management and efficiency enhancement, said Jared Osoro, the Director of the KBA Centre for Research on Financial Markets and Policy.