WARNING

Operational risks in the banking sector to remain high–report

Banks in the country have shifted to increased use of financial technology and new markets

In Summary
  • According to a CBK report , sectoral and cross–border operations and the increased use of financial technology have seen increased cases of fraud.
  • CBK has also warned that banks' credit risk which remains elevated due to the Covid–19 shocks, could increase.
CBK Headquarters
CBK Headquarters
Image: FILE

Operational and governance risks in the banking sector are expected to remain high as banks become more interconnected and digital, a new report has warned.

According to the CBK Financial Sector Stability report , sectoral and cross–border operations and the increased use of financial technology have seen increased cases of fraud, data privacy concerns, cyber-attacks and cybersecurity threats.

Banks in the country have shifted to increased use of financial technology and innovations to deliver financial products and services to meet the consumer needs.

The lenders have also ventured into new markets across the region  as they seek to increase their assets and grow their portfolio.

This has exposed them to technology-related risks and fraud.

The apex bank recommends the need for more prudent and stringent remedial technology controls and risk management measures to address these risks.

CBK has also warned that banks' credit risk which remains elevated due to the Covid–19 shocks, could increase if the pandemic intensity and duration persist.

The risk is reflected in rising Non -performing loans(NPLs).

Official CBK data shows that the NPLs ratio increased from 5.2 per cent in December 2013, to 14.1 per cent December 2020.

“The devastating impact of Covid–19 pandemic may sustain NPLs upward,” said CBK.

The report also noted that banks’ perceived tendency of flight to quality and safety during the pandemic reflected elevated credit risk, sovereign exposures and technology risks.

This emerged as banks and customers sought safe assets with positive return and preservation of value.

“At the height of Covid–19 pandemic, banks invested heavily in long–term Treasury bonds, for safety and quality. If the situation normalizes, banks may quickly sell bonds to fund increased credit demand. The resultant increase in interest rates will then lead to the decline in bond prices held, which are subject to mark–to–market valuations.,” said CBK.

The risk, CBK says will  be in valuation losses which reduce profitability, and in turn capital levels.

Political noise around the 2022 general elections which impacts the economy also pose concerns on banks stability.

The CBK conducted a banking sector credit risk stress test in April 2021 to assess the resilience of banks to plausible but realistic Covid–19 scenarios.

The stress test focused on credit risk given that the pandemic had impaired borrowers’ ability to repay loans due to disruptions to firms’ and households’ livelihoods.

The test results  indicated that under Adverse Scenario for Covid–19 pandemic, NPLs ratio is expected to worsen to about 18.9 per cent in December 2021. 

“Based on the projected gross loans, the computed NPLs ratio is expected to range between 15.5 per cent in the baseline scenario and 17.7 percent in the severe scenario in June 2021, and 15.7 per cent in the baseline to 18.9 per cent under severe scenario by December 2021, compared to the actual NPLs ratio of 14.1 per cent in December 2020,” CBK said.

Overall, CBK's sector outlook for 2021, is stable and resilient underpinned by strong capital and liquidity buffers coupled with economic recovery as Covid–19 pandemic wanes on increased vaccinations; and government policy measures.