SECTOR REPORT

Banks' contribution to national kitty drops by Sh13bn on Covid effects

The profitability of Kenyan banks also declined to a nine-year low in 2020

In Summary
  • Analyses of tax contribution of the banking sector shows that the sector contributed Sh42.4 billion in 2020 down from Sh55.4 billion in 2019.
  • According to the Kenya Bankers Association, the drop was majorly attributed to the depressing effects of the pandemic on incomes.
Central Bank of Kenya headquarters.
Central Bank of Kenya headquarters.
Image: /FILE

The banking sector's contribution to the national kitty took a thrashing from the economic effects of Covid-19, dropping by a whooping Sh13 billion in 2020.

Analyses of tax contribution of the banking sector shows that the sector contributed Sh42.4 billion in 2020 down from Sh55.4 billion in 2019, representing a 23.6 percent drop.

According to the Kenya Bankers Association’s (KBA) State of the Banking Industry (SBI) Report 2021, the drop was majorly attributed to the depressing effects of the pandemic on incomes.

KBA noted that despite this being a major drop the sector would have contributed more to tax revenue had it not borne most of the weight of supporting other sectors of the economy.

The profitability of Kenyan banks also declined to a nine-year low in 2020 on the back of the Covid-19’s negative impact on the economy.

According to the KBA-SBI Report 2021, banks’ profits before tax dropped by 30.9 per cent — the lowest level since the year 2012.

The report attributes the decline to a depressed economic performance and quality of assets held by banks during the year.

Asset quality across the industry players deteriorated in 2020, largely due to the adverse effects of the pandemic on households and enterprise earnings, that occasioned an increase in the sector’s non-performing loans (NPLs).

NPLs stood at Sh433.7 billion as at end 2020 compared with Sh334.3 billion as at end of 2019.

The gross NPLs in 2020 represented about 14.5 per cent of gross loans, compared with 12.5 percent as at the end of 2019, with the observed increase in the ratio associated with an increase in both the volume of NPLs and a decline in the loan growth.

In the period, provisioning for loan losses increased by 47.5 per cent to Sh198.1 billion from Sh134.3 billion in 2019, with loan loss accommodations absorbing 45.7 per cent of non-performing loans compared to 40.2 per cent in 2019.

The banking sector’s total assets on the upside expanded by 12.4 per cent in 2020, to Sh5.4 trillion from Sh 4.8 trillion in 2019, driven by a faster expansion in non-loan assets ,mainly investments in government securities , which grew by 18.5 per cent as gross loans and advances rose by 6.7 per cent.

Net loans and advances increased by 9.1 per cent in 2020 to close at Sh2.93 trillion from Sh2.63 trillion in 2019.

The industry’s average Return on Assets declined to 2.0 percent, a pace faster than trend declines noted over the past few years.

In addition, the industry’s average Return on Equity scaled down to 13.3 percent from an average of 21.1 percent recorded in 2019.

The KBA-SBI Report indicates that the sector’s outlook for the year 2021 appears stable, supported by adequate capitalization and liquidity levels.

KBA Chief Executive Officer Habil Olaka said that banking sector players have continued to review and enhance their business models, seeking to leverage on frameworks that promise efficiency gains, particularly through adoption of technology-based innovations.

The Association's Research and Policy Director Samuel Tiriongo noted that even with the sector working towards recovery, this might take longer than expected as we look forward to an election year.