Political risk, main headache for Kenyan banks in 2022 - report

Political risk tops challenges facing Kenya's banking sector in the latest outlook by Renaissance Capital. 

Dubbed Kenyan Banks: Waiting with bated breath, the report says there is a likelihood of a slowdown in economic activity in the year to June 30, with muted lending activity in the first half of the year.

This, as lenders, adopts a wait-and-see approach in the run-up to the August 9 general election.

''A peaceful election cycle will be positive for the banks as this will be less intrusive to their business operations. However, a tense and protracted one will be negative given the disruption and the potential headwinds that could arise,'' the report reads in part.

Local banks have become perennial casualties of the country's electoral cycle, with the negative effect felt in the economy.

For instance, the country's economy shrunk to 4.9 per cent in 2007/8 on heightened political tension that saw banks cut lending to the private sector, low deposits due to fewer business activities and high non-performing loans. 

As a result, lenders were forced to issue high loan loss provisions of up to 65 per cent of their total non-performing loans, the highest witnessed in the country's history. 

The global financial crisis witnessed in 2008 worsened matters for the banking sector. At least 12,300 people were killed in the aftermath of the post-election violence with over half a million displaced.  

Although the political tension was less volatile in 2013, with the economy expanding from 4.6 per cent the previous year to five per cent, negative sentiments recorded during the 2007/8 election clashes saw lenders operate cautiously.

In the run-up to last year's protracted election cycle, private sector credit growth stood at a paltry 1.6 per cent of GDP, its lowest in over a decade, and down from 25 per cent in mid-2014.

While this was mainly attributed to the interest cap regime imposed a year earlier to tame the high cost of credit in the country, negative political sentiment played a huge role. 

The country was forced to conduct a fresh presidential election after the Supreme Court annulled President Uhuru Kenyatta's initial win. 

Stanbic Bank’s PMI survey, a measure of private-sector activity, dropped sharply to 42 in September 2017 from 48.1 in August. This was the lowest figure since the index started in 2014. Any reading below 50 is a sign of contracting business.

According to the Renaissance Capital, the political storm ahead of August 9 polls could erode the banks' asset quality which is still recovering from the Covid-19 menace.

The report indicates that there was a significant improvement in asset quality in 2021, following a difficult 2020, but that Non-Performing Loans slowed.

The NPLs grew at nine per cent year on year in September last year compared to 28 per cent growth in January.

Restructured loans represented 7%, 7% and 2% of gross loans in 9M21 at Equity, Cooperative Bank and KCB vs 23%, 15% and 16% as at FY20, respectively.

''However, we note that the system NPL ratio in Kenya remains elevated at 13.6 per cent and potential risks still exist,'' the report reads. 

Apart from the political risk, Renaissance Capital is worried that the cost of living is likely to go up on currency depreciation and high fuel prices. 

It appeals for CBK's speedy approval of the risk-based pricing template to push margins up and improve the returns profile of the Kenyan banks.

The country's inflation is expected to average at 5.9per cent in 2022 and 5.5per cent in 2023.

This projection, according to FocusEconomics is expected to rise as the shilling depreciates against the US dollar. 

Yesterday, the shilling gained significantly against the greenback to trade 113.50 compared to an all-time low of 114.15 recorded Wednesday. 

Renaissance Capital has also listed competition as a significant risk for banks in Kenya this year.

According to the report, the banks could face intense competition from Fintech and telcos while pursuing their respective digital strategies.

Other risks facing banks include regional diversification and execution risks.