Half of Kenya's Commercial Banks Face High Capital Risk in Case of Loan Defaults
30 October 2023
Half of Kenya's Commercial Banks Face High Capital Risk in Case of Loan Defaults
A recent stress test conducted by the Central Bank of Kenya (CBK) revealed that approximately half of the country's commercial banks would require a substantial injection of at least Sh109.4 billion in fresh capital if each of their top three borrowers were to default on loans. These findings, which were disclosed in the recently released sector stability report, underscore the significant risk present in Kenya's banking sector.
In a severe scenario where all top borrowers were to default, the CBK stress test shows that 19 banks would fall short of the minimum capital requirements by a minimum of Sh109.4 billion.
This projected impact exceeds the Sh63 billion estimated in a previous CBK stress test, which indicated that 21 banks would need to raise capital to meet the minimum core capital adequacy ratio of 10.5 percent in case of large borrower defaults.
The CBK has emphasized the vulnerability of most banks when it comes to the defaults of their top three borrowers, highlighting the concentration risk posed by heavy reliance on a limited number of clients.
To mitigate this risk, the central bank has called on financial institutions to closely monitor the performance of their top borrowers and develop effective strategies for managing defaults before they escalate into systemic issues. The findings of this stress test are likely to prompt a reevaluation of risk management practices in the Kenyan banking sector.
ECONOMY
Kenyan Shilling Crosses 150-Unit Mark Against the Dollar Amid Sustained Depreciation
The official exchange rate of the Kenyan shilling against the US dollar breached the 150-unit
This ongoing devaluation has led to a gradual narrowing of the gap between the official exchange rate and the retail selling rates of the American currency. The Central Bank of Kenya's (CBK) indicative rate for Monday showed a buying price of Sh149.84 and a selling rate of Sh150.04 per dollar, averaging at 149.94. This comes as the shilling has depreciated by 17.7 percent against the dollar since the beginning of the year, more than double the 8.3 percent it lost in the entirety of 2022.
The sustained depreciation of the Kenyan shilling has raised concerns among both economists and the general public. The shilling's decline against the US dollar since the start of the year has been substantial, emphasizing the challenges faced by Kenya's economy. While the CBK's indicative rate stood at 149.94 units for the dollar, the average trading rate had risen to Sh150.03 later in the day. Commercial lenders have also witnessed significant variations in their rates, with major banks selling the dollar at prices ranging from Sh154.95 to Sh157 and buying at rates between Sh141 and Sh149.95.
Kenya's World Bank Debt Surges Past Sh1.5 Trillion in June
Kenya's debt to the World Bank reached a staggering Sh1.57 trillion at the end of the previous financial year, according to fresh data published by the Central Bank of Kenya.
This notable increase from the Sh1.46 trillion recorded at the end of May reflects the country's growing indebtedness. The surge, amounting to Sh110.9 billion in just a single month, means that nearly 60 percent of Kenya's total debt owed to multilateral lenders is now attributed to the World Bank.
The recent spike in Kenya's external debt has been attributed to several factors, notably the influx of new disbursements during the last month of the financial year. This financial boost, alongside a sustained depreciation of the Kenyan shilling by 17 percent since January, has compounded the nation's debt predicament.
The Kenyan Treasury explained:
"The Sh309.4 billion increase in external loans is attributable to disbursements made during the month and depreciation against major currencies,"
Kenya's mounting debt, particularly to the World Bank, raises concerns about the nation's fiscal sustainability and its ability to service these loans in the future.
BANKING
Interest on Term Deposits Reaches 11-Year High of 8.39% as Commercial Banks Vie for Depositor Dollars
Interest earned by bank customers from term deposits has surged to an 11-year high of 8.39 percent as commercial banks fiercely compete to match the interest rates offered by rival asset classes.
Data released by the Central Bank of Kenya (CBK) reveals that the deposit rate has risen by 12.3 percent as of August, marking a significant uptick from the 7.47 percent at the beginning of the year. This increase reflects commercial banks' concerted efforts to attract long-term deposits from customers and diversify their funding sources, especially given the heightened competition.
Commercial banks, in their bid to woo customers into locking in their funds for specified time frames, typically offer premium interest rates on term deposits. These deposits form a crucial part of the banks' funding base, primarily allocated towards various lending activities. Concurrently, deposit rates on regular current and savings accounts have also witnessed a similar increment throughout the year. However, the returns for non-fixed-deposit savers have remained lower, with a return of 4.05 percent in August, underscoring the disparity in earnings between the two types of accounts.
This 8.39 percent deposit rate, the highest since May 2012, is in line with the broader trend of rising interest rates observed this year.
Multiple factors, including inflationary pressures, the tightening of monetary policy, and macroeconomic and external shocks, have collectively contributed to this upward trajectory in interest rates.
Kenya to Receive $500 Million Syndicated Loan from Trade and Development Bank
Kenya is poised to receive a substantial injection of $500 million (Sh75.0 billion) in November through a syndicated loan arranged by the Trade and Development Bank (TDB).
The TDB has been tasked with raising to $1 billion (Sh150.0 billion) for Kenya in the current financial year, as outlined in the Draft Budget Review and Outlook Paper (BROP) published by the National Treasury on September 15th.
According to the National Treasury, the TDB syndicated loan has already been signed, and the disbursement of the $500 million is expected to take place in the coming month.
This substantial influx of funds is part of Kenya's efforts to recalibrate its borrowing plan for 2023/24.
As per the revised plan, domestic borrowing is expected to decrease to Sh415.0 billion from the initial projection of Sh587.0 billion.
Simultaneously, external financing will see an upward revision, with the new projection being Sh448.7 billion, significantly higher than the initial estimate of Sh131.0 billion.
This financial boost is expected to have a positive impact on Kenya's economic outlook, supporting various development initiatives and projects essential for the country's growth and stability. The successful mobilization of the syndicated loan underscores Kenya's commitment to securing much-needed funds to fuel its economic progress.
AGRICULTURE
Farmers in Kirinyaga County Embrace Sorghum Production to Meet Rising Demand for Beer
Farmers in Kirinyaga County are increasingly turning to sorghum production to meet the surging demand for the commodity, primarily for beer production. The driving force behind this agricultural shift is the East African Breweries Limited (EABL), which has been actively contracting local farmers to cultivate sorghum for use in brewing.
Last rainy season, approximately 1,500 farmers in Mwea constituency spearheaded contract sorghum farming for EABL, collectively supplying about 330 tonnes of sorghum to the brewery and earning a cumulative revenue of approximately Sh15.8 million. This season, the number of contracted farmers engaged in sorghum cultivation has seen a significant increase, soaring from around 1,500 in the previous season to over 2,500.
The expansion of sorghum farming in Kirinyaga County is largely attributed to the ready market provided by EABL, and it has not only become a viable source of income for local farmers but also a pivotal element in bolstering the county's economy.
WHAT YOU MUST HAVE MISSED
Attorney General Exempts Board Members from Affordable Housing Levy
Attorney General Justin Muturi has clarified that the board of directors of Kenyan firms and State corporations should not be subjected to the affordable housing levy, dealing a blow to KRA's revenue collection plans.
In a recent letter addressed to the management of Kenyatta National Hospital (KNH), who sought his legal counsel on the matter, Attorney General Muturi emphasized that board members are not to be considered as employees
IMF Warns of Regional Economic Slump Amid China's Slowdown
The International Monetary Fund (IMF) has issued a cautionary alert regarding the potential for a regional economic downturn as a result of the spillover effects stemming from China's ongoing economic deceleration. The IMF's assessment highlights the intricate economic ties between China and sub-Saharan African nations, most notably Kenya, due to the region's substantial dependence on the Chinese market for financing and export opportunities.
The State Department for Housing and Urban Development has issued a call for applications from potential strategic partners to join forces with the government in the affordable housing project
The invitation is not restricted to projects solely on public land. Private land with the potential for housing development will also be considered. Developers are categorized based on their project capabilities.
The highest category includes developers with the capacity to undertake projects exceeding 100,000 housing units, followed by category B, encompassing those who can handle projects ranging from 10,000 to 100,000 housing units. Category C is for developers equipped to undertake projects involving 1,000 to 9,000 houses, with the lowest category reserved for developers aiming to construct below 1,000 housing units.