This archive report was first published on 2 December 2019.
Kenyan banks have defied the odds to maintain profitability in the face of interest rate caps, thanks to their ability to keep costs low and net interest margins high.
According to a recent investor note by Moody's, the country's top lenders have been able to widen their margins by reigning in costs and focusing on high-margin retail clients such as small and medium enterprises (SMEs).
As of March 31, 2019, the three tier 1 lenders - Equity, KCB, and Co-operative - had an average cost to income ratio of 49 percent, with a weighted net income return of 3.7 percent over definite assets.
Moody's attributed the strengthened position in the sector's income growth to the deep penetration of financial services in the country, with Kenya leading the way in financial inclusion on the continent.
“Kenyan bank's stronger net interest margins are, to a large extent, a result of high financial inclusion where more than 80 percent of the adult population has some access to financial services,” the note read.
However, the sector's growth is not without its challenges. Higher retail overhead costs are a major concern, with the average cost to assets ratio averaging 5.5 percent between 2015 and 2018.
Staff costs make up the largest expense, accounting for 45 percent of total operating costs or 2.3 percent of assets.
The recent lifting of the interest capping law is expected to result in a gradual increase in net interest margins, leading to even higher earnings for banks.
