Why Kenyan Banks are Declaring Super Profits during Harsh Economic Times

When a country has debt fuelled economy due to a lack of growth in savings and capital accumulation, banks tend to perform better because of the misappropriate gap between interest paid to savers and interest paid on loans.

The high cost of financing stifles growth of innovative startups as access to capital is restrictive. It also hinders private development such as home improvements, purchase of new houses which all would add to capital stock of a country.

The lack of sustainable job creation and income mobility in Kenya has also driven the boom in quick unsecured but highly priced digital loans some which end up in consumption or gambling.

According to FinAccess, digital borrowers took an estimated 25 million loans or 8 loans per borrower in 2018. Over the last few years most banks have noticed that opportunity, exploitative as it is, to circumvent loan pricing requirements of the Central Bank and roll out the same digital loan solution such as M-Shwari, KCB-Mpesa, Timiza...

One would have expected a reduction in the pricing of the loans as the innovation brings in efficiency in processing loans, that is reduction in human cost, branch cost and its auxiliaries, however, those benefits have not been passed on to the consumers.

Banks in Kenya and the world over have seen periods of super profit other than the brief periods of recessions such as 2008-09 credit crisis.

This points to the fact that banks would ordinarily still generate profits even in periods of not so stellar economic growth unless it directly affects the quality of their assets.

Banks make money from the margins they make, from how they source their funding, and what they get out from the loans and other investments they make and how much they pay for the money they loan out.

If we look at the situation in Kenya, the average savings rate, which is the rate which banks pay if you save money with them in a saving account is 2.5% and the average rate that banks pay for deposits from institutions is 6.53% as per the Central Bank of Kenya data set.

However, the average lending rate, which is what they charge for lending money is 12.12%. Therefore, for every Ksh.100 in savings they pay Ksh.2.5 and make Ksh.12.2 a profit of Ksh.9.7, a similar calculation can be done using the average deposit rate.

Using a real example if one looks at Co-operative Bank's financial results of 2021, it received Ksh.36 billion from interest charged on loans, if you add fees and commissions as well as interest received with the deposits they don’t loan out but buy government bonds with, they received a total of Ksh.70 billion versus a payout of Ksh.13 billion on the customer deposits they hold. 

The major question that remains is whether the quality of the loans is as stated by the banking sector.

During the Covid-19 period, a lot of restructuring happened to cushion banks from increase NPL provisions, that was improving loan book quality by re-engineering.

The question rises on the pretext of deteriorating economic fundamentals both due to local policy blunders and external shocks, that do not seem to be reflecting in the asset quality of the banking sector in either increasing of NPL provisions or NPL ratios.

Are the banks reading from a different economic play book?