This archive report was first published on 23 August 2019.
Kenya's commercial banks have defied the economic downturn to post a record Sh85.8 billion profit in six months to June, a 12.6 percent increase from the previous year.
According to the Central Bank of Kenya (CBK), the sector's pre-tax profit rose significantly in the six-month period, outpacing the 9.8 percent increase recorded in the same period last year.
The lenders' resilience in a tough economy has been attributed to their heavy reliance on government securities, which have pumped billions into Treasury instruments. However, this approach is unsustainable and leaves the lenders vulnerable to changes in government debt policies.
Kenya Bankers Association (KBA) chief executive officer Habil Olaka noted that the profits from banks are not coming from crucial areas such as extending credit to small and medium-sized enterprises (SMEs). Instead, they are coming from areas such as significant lending to government through purchasing Treasury instruments.
"Unfortunately, the profits from banks are not coming from crucial areas such as extending credit to SMEs. Instead, they are coming from areas such as significant lending to government through purchasing Treasury instruments… ideally, the profitability of banks should be aligned to the economic aspirations of the country," said Olaka.
Olaka added that a significant portion of the lenders' earnings is also coming from cost-cutting measures, including leveraging on technology, reducing cost overheads, trimming branch networks, and cutting staff numbers.
However, the reluctance to lend to the private sector is evident in the faster growth in bank deposits compared to the loan books, with the difference largely being pushed to government bonds.
The sector's gross loans rose by 6.5 percent or Sh161 billion in the six-month period to Sh2.654 trillion, while the deposits went up 12.6 percent or Sh344.5 billion to Sh3.506 trillion.
As the lenders continue to push for the lifting of the control on cost of loans, they face headwinds from Parliament, which is still convinced that repealing the rate cap law will lead to a return to the days of punitive interest rates.
Meanwhile, the lenders' cost-cutting measures have led to job losses, with Stanbic Kenya planning to shed at least 200 employees in an early retirement plan by the end of this year.
