Central Bank of Kenya (CBK) has put banks operating in the country under tight scrutiny as it moves to ensure market confidence in the sector following the collapse of two commercial banks.
The International Monetary Fund (IMF) said in a statement that the CBK is working on ways of compelling banks to reclassify loans and raise the provisions for bad loans by an extra Sh2.4 billion.
“As part of a stress test to assure itself of the soundness of the banking sector, CBK has intensified on-site supervision efforts, it has also asked banks to reclassify some of their loans and increase provisioning for credit losses (Sh2.4 billion),” said the IMF in an update on the negotiations of a precautionary credit facility to the Kenyan National Treasury.
The interventions by CBK come in the wake of the fall of Imperial Bank as well as Dubai Bank. These two setbacks in the banking sector have eroded depositors’ confidence in the mid and smaller tier banks, as a result, weakening their deposit franchises and potentially curbing any contagion effects one may anticipate.
Forensic auditors from Kenya Deposit Insurance Corporation (KDIC) stated that fraudulent loans coupled with inadequate provisions of bad loans eroded Imperial Bank’s capital adequacy position. Imperial Bank was put under receivership by CBK in October, after CBK announced nearly Sh34 billion (approx. $340 million USD) in fraudulent activity.
Dubai Bank on the other hand was placed under receivership in August 2015 after breaching the cash reserve ratio for an entire one month and failing to honour its financial obligation. Failure of the two banks sent ripples to depositors as they lost confidence in banks.
According to CBK governor Patrick Njoroge, non-performing loans are currently at an industry average of 5.7 per cent. He noted that though the average is currently not an issue in Kenya, there are interventions being placed to ensure all loopholes that will result to further collapse of banks are curtailed.
CBK’S Prudential Guidelines state that loans are classified into five categories at a minimum, the categories are; ‘normal’, ‘watch’, ‘substandard’, ‘doubtful’ and ‘loss.’
IMF noted that already, the issue of loan provisioning has put several banks in focus as they need to be closely watched to save them from collapse.
The interventions by CBK and IMF come at a time when Ratings agency Moody’s has predicted a decline in market confidence towards small and midsize Kenyan banks following the closure of Imperial Bank and Dubai bank.
The agency in its latest report said that small banks could suffer a hike in their interbank rates as their larger counterparts take caution to reduce their level of exposure.
“We expect that the wider systematic implications of Imperial Bank’s failure will be limited, although we do see a high likelihood of tougher funding conditions…This may include both deposit withdrawals and a hike in interbank rates while their ability to offer correspondent banking related services would be impaired,” said the Moody’s statement released in October. Kenya Bankers Association has moved to quell fears by customers that more banks could close down following news of Imperial Bank’s receivership.
The Kenya Bankers Association (KBA) together with the CBK have insisted that despite the actions being taken to ensure stability in Kenya’s financial sector, there is no cause for fear.
KBA CEO Habil Olaka told The Exchange that the organization is providing appropriate support and information to the banking industry to stop a situation that may undermine market confidence.
“Our banking industry is leading in Africa in terms of financial inclusion and access to formal banking services. Imperial Bank and Dubai Bank are secluded cases and must not erode confidence in the Kenyan banking sector,” said Mr Olaka in a phone interview.
The Kenya National Treasury and the CBK have asked for a precautionary forex facility from the IMF to be issued only when shocks to the economy are realized, and in case the shilling fluctuates further against the dollar.
The IMF has set conditions that will force the CBK to constantly monitor banks to ensure performance within the banking sector is as required by the industry standards.
The CBK will in the next few weeks conduct a review on the sector to ascertain how it would perform under different economic and loan repayment conditions.
As the review begins, the CBK has ordered that Imperial Bank be opened in a month’s time adding that the situation has been contained and fears for a domino effect are simply rumors.
A detailed proposal that would set the bank back to its feet, quotes an injection of new capital, conversion of some of the large deposits to equity, recovery and collateralization of the fraudulent loans, as well as a change of Board of Directors and senior management as the big game changer moves.
The troubles of Imperial Bank were allegedly caused by former late Managing Director Abdulmalek Janmohamed through an elaborate fraud scheme. The scheme is said to have robbed the lender of Sh34 billion over a period of 13 years, forcing the CBK to shut it down.
Mr. Janmohammed used a network of 20 companies and individuals to execute and cover up the mega fraud that shook Kenya’s financial services sector.
George Oraro, one of Kenya’s top lawyers filed an affidavit demanding the money obtained fraudulently by the respondents. Court papers show that Oraro accuses the 20 individuals and companies for colluding with deceased Imperial Bank Managing Director Abdulmalek JanMohammed to siphon the money.
Analysts have noted that given the situation that befell Imperial Bank as well as Dubai Bank, a number of banks are increasing their provisioning to beat the deteriorating economic conditions. The analysts also state that in the near future, mergers and acquisitions will be a common occurrence in the sector as small lenders look to stabilize their accounts.
According to Nairobi-based Standard Investment Bank, Cooperative Bank’s loan loss provisions will increase to 1.1 per cent from 0.7 per cent last year.
It also forecasts that Kenya Commercial Bank, NIC, and Diamond Trust Bank loan loss provisions will rise from 1.0, 0.3 and 0.7 to 1.3, 0.9 and 1.0 per cent respectively by the end of this year.
They also forecast that Barclays will retain its provisions as a percentage of average gross loans at 1.1 per cent, same as CfC Stanbic at 0.9 per cent, I&M at 0.8 per cent and Standard Chartered at 0.8 per cent.
Written by Lilian Mwakio