- Overall, the banking sector remained stable and resilient
- Yesterday, the US dollar exchanged at Sh139
Image: FILE
Foreign exchange trading income is the single largest contributor to bank's non-interest income, illustrating just how lenders are reaping from the ongoing dollar shortage.
The Kenya banking sector report by Pan African credit rating agency, Agusto &Co released on Tuesday shows forex trading contributes 39 per cent of bank's non-interest income.
Yesterday, the US dollar exchanged at Sh139, having shed almost 20 per cent in past 12 months. Traders told the Star that the greenback is going for up to Sh150 in the parallel market.
Agusto & Co’s Group managing director, Yinka Adelekan says that although the dollar crisis continues to persist in medium term, it will eventually ease by mid next year.
This is pegged on various factors including the decision by the CBK to unlock the FX market for banks.
"The recently introduced Foreign Exchange Code (FX Code) by the CBK is expected to enhance the regulations of the banking industry and improve the dynamics of the foreign exchange market by promoting responsible engagement of the players as well as mitigate the risks associated with the trade,''Adelekan said.
The foreign exchange code, among others, prohibits banks from engaging in trading practices, quoting prices or making transactions with the intention of manipulating price movements or disrupting the functioning of the market.
Overall, the banking sector remained stable and resilient, with a total capital adequacy ratio of 19 per cent in December 2022 above the minimum capital adequacy ratio of 14.5 percent.
Similarly, the sector’s liquidity ratio stood above the minimum statutory level of 20 per cent at an average liquidity ratio of 50.8 per cent in the same period.
Total net assets grew by 9.4 per cent from Sh6 trillion in December 2021 to Sh6.6 trillion in December 2022.
Customer deposits increased by seven per cent from Sh4.5 trillion in December 2021 to Sh4.8 trillion in December 2022.
On the regulatory front, the rating firm praised CBK for continuing to strengthen the Credit Information Sharing (CIS) framework.
This is to support the ongoing implementation of risk-based credit pricing in the banking sector.
More importantly, the reforms are intended to enhance the effectiveness of CIS in pricing of credit and expanding access.
Towards this end, Credit Reference Bureaus (CRBs) will improve the quality of their reports and enhance the robustness of their credit scoring models and align them to best practice.
Additionally, CBK has reminded banks to consider the credit scores of borrowers in addition to other factors in making lending decisions.
Climate-related risks such as floods, droughts and other natural disasters led to financial losses for banks as well as for their customers in 2022 as there was significant year-on-year deterioration in Non-Performing Loans (NPLs) for climate-related sectors such as energy and water (44.3 per cent) and agriculture (44.1 per cent) in 2022.
Increasing demand for Shari’ah-compliant products and services (Murabaha, Ijarah, Musharakah, Takaful) amidst a lack of awareness, skilled professionals and comprehensive legal regulatory framework.
Increased investment in Environmental, Social and Governance (ESG) frameworks, data collection and reporting capabilities by banks to align with global standards such as the Task Force.
Last year, the banking sector capital and reserves increased by 2.7 per cent to Sh917.6 billion from Sh893.7 billion in December 2021.
All the peer groups registered increased capital and reserves.
The increase in capital and reserves is attributable to additional capital injections by commercial banks as well as retained earnings from the profits realized in the year.
The banking sector registered strong performance in 2022, with profit before tax increasing by 22 per cent from Sh197 billion in December 2021, to Sh240.4 billion
The increase in profitability was attributed to a higher increase in total income (Sh92.7 billion) compared to increase in total expenses (Sh80.5 billion).
The large peer group accounted for 86.7 per cent of the total pre-tax profit, a decrease from 86.9 per cent recorded in 2021.
The small peer group proportion of total pre-tax profit increased from 0.8 percent in 2021 to 1.2 percent in 2022.
The medium peer group proportion of total pre-tax profit decreased from 12.3 per cent to 12.1 percent in 2022.
The rating agency says the proposed implementation of 20 per cent excise duty on any amount charged in respect of lending by digital lenders could potentially lead to a decrease in demand for digital lending services
"This is likely to trigger a shift towards traditional banking channels or a hike in the cost of digital lending services,''Adelekan said.