As 2022 ended, Kenya’s banking sector continued to record profits as the country recovered from the pandemic and enjoyed a peaceful general election. For instance, KCB and Equity bank recorded an increase in their net profit for the first nine months of 2022 by 21.4% and 28%, respectively, to Sh30.6 billion and Sh34.4 billion. The sector will continue enjoying steady profits in 2023 as credit agency Moody’s expects the sector’s outlook to remain stable.
According to Moodys, the banking sector will continue to record strong profitability, high liquidity, and solid capital amid rising problem loans. Kenya’s economic growth will remain steady at 5% in 2023 and 6% in 2024, compared to 5.3% in 2022. This will be mainly due to businesses returning to the norm as they recover from the effects of the pandemic.
With businesses starting to grow, banks are expected to rack in higher yields on loans from businesses and government securities. Kenyan banks make most of their revenue from interest income, with interest income from government securities comprising a third of the total revenue from interest. Banks’ profitability will continue to rise in the year.
Furthermore, due to the Central Bank of Kenya (CBK) raising its benchmark interest rate to 8.75%, banks are expected to start pricing in the hikes leading to an increase in their interest income. The sector is also set to see further profitability as the CBK approves the risk-based loan-pricing formula allowing banks to charge higher interest rates on risky borrowers. Despite increasing interest income, dependence on such borrowers will lead to high-problem loans, loans not recovered from borrowers.
Already Kenyan banks are witnessing high problem loans. For example, according to the agency, three banks (KCB, Equity, and Co-operative bank) have seen their average problem loan ratio increase from 7.6% in 2019 to 13.6% in the first half of 2022. Even though several businesses are already recording growths, many more are yet to record profits; many of them have been affected by the rising global commodity prices due to the Russia-Ukraine conflict, which has increased the cost of imports. As a country that relies heavily on imports, the cost of commodities has increased, leading to high inflation, which reached 9.15 in December 2022.
As a result of this rising inflation, in conjunction with high interest rates and delays in the payment of government bills caused by lower government spending as it tackles its high government debt, a borrower’s finances are expected to suffer, thus spelling trouble for banks, as they will be unable to service their loans leading to problem loans. Despite being one of the major challenges the banking sector will face, strong profitability coupled with diversification by some banks and reliance on attracting high customer deposits, mainly due to the adoption of digital banking services, the problem loans will remain manageable.
Regarding capital levels, the sector has remained above par, as its shareholders’ equity to total assets was 14.2% in June 2022. Total regulatory capital was 18.8% of risk-weighted assets, well above the regulatory requirement of 14.5%. However, despite the solid stance, larger banks are in a better position when compared to smaller banks. For instance, in 2021, five small banks breached the minimum capital adequacy requirement. Alongside weak profitability, mergers and acquisitions will continue to be popular as larger banks look to continue their growth. In contrast, foreign banking groups look to such scenarios to enter the market.
Despite solid capital levels, Kenyan banks are at an additional risk of sharing the same risk as the government. With the government of Kenya having a negative outlook according to Moody’s, Kenyan banks having oversized holdings of government bonds, over two times their equity as of June 2022, links their creditworthiness to that of the sovereign, leaving their stability at risk. (
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