BUMPY ROAD FOR KENYAN BANKS IN 2012

A slowing economy, delays by Central Bank of Kenya (CBK) to release its tight grip on the credit market and a slow growth of the loans market are on the list of challenges that will determine how banks perform this year. The key issues facing commercial banks this year will be how to grow their loan books as well as safeguard quality of assets sitting in their vaults. Already, a number of players are in high gear campaigns to mobilise cheap deposits from customers with promises of cash prizes and gifts to those who participate in these promotions. A forecast and update report on Kenyan Banks: Forging through the Storm, done by equity firm Renaissance Capital warns that the macro outlook remains challenging especially with Kenya’s economy expected to shrink to 4.0 per cent this year from 4.4 per cent in 2011. Recovery has been noted in the agricultural sector, albeit modest and hydro-power generation, owing to return of good rains. However, high cost of credit has had a dampening effect on financial services, construction, wholesale and retail trade and real estate sectors, says the Renaissance review. The financial services showed the sharpest slowdown in growth, falling to 3.8per cent in the first quarter of this year from 12.6per cent over the same period in 2011. Construction and real estate were also hard-hit, with activity in the construction sector halving. The jury is still out on whether the Monetary Policy Committee, a policy think tank for CBK, acted in sync with tempo in the economy or delayed in cutting the Central Bank Rate (CBR). There is expectation that inflation will hit single digit levels in July, proving more headroom for the CBK to further lower CBR from the current 16.5 per cent level. Economists at Renaissance Capital expect that CBK to further cut this policy rate before end of the year, perhaps to between 12-14 per cent. However, analysts blame the CBK for being on the back foot mentioning that rate cuts should have begun earlier to avoid a negative impact on growth. The negative effect of a tight monetary policy stance, which begun in 2011, was manifest in the first quarter of 2012. This is when the loan book of most banks begun to shrink. For instance, KCB’s fourth quarter, 2011 growth fell to a mere 2per cent and declined in first quarter of this year as well. Equity Bank, another big hitter in the retail segment, had its loan book slow sharply to 4per cent in the last quarter of 2011 from 12per cent in the third quarter of 2011. SUMMARY • While the ratio of non- performing loans fell 8 per cent in 2011, it rose marginally by 1.3 per cent in the first quarter of this year. • Fiscal pressure is expected following a 22 per cent increase in Kenya’s budget to Sh1.46trillion. While Finance Minister Njeru Githae attributes the significant increase in spending partly to the implementation of the new constitution and strategic interventions in various sectors, including security. • But analysts think the government’s projection of a 19per cent increase in revenue, premised on its ambitious 5.3per cent growth projection, is optimistic.