The Kenya Bankers Association Centre for Research on Financial Markets and Policy released the third annual State of the Banking Industry (SBI) Report on 27th July, 2021. It focuses on the impact of the COVID-19 pandemic on the banking industry and its pass-through effects to the rest of the economy given the sector’s central role as an engine to drive all other sectors’ economic activities. 

According to the Report, the impact of the pandemic varied from sector to sector exposing some vulnerabilities. However, the Banking Sector was able to weather the storm posting strong and adequate liquidity and sufficient capital positions that continue to carry the rest of the economy through the devastating effects of the Covid-19 pandemic.

The Pandemic saw the deployment of a number of policies and measures to cushion households and enterprises as well as encourage credit growth. The banking sector measures to mitigate the adverse effects of Covid-19 Pandemic included; the lowering of the Central Bank Rate from 8.25% to 7.25% in March 2020, and further to 7.0% in April 2020 as well as a wave of all charges for balance inquiry and transfers between mobile money wallets and bank accounts.  

However, despite the mitigation factors, the Sector’s total assets expanded by 12.4 percent in 2020, to Kshs. 5.4 trillion from Kshs. 4.8 trillion in 2019, driven by a faster expansion in non-loan assets – mainly investments in government securities- which grew by 18.5 percent, as gross loans and advances grew by 6.7 percent growth during the period. Net loans and advances grew by 9.1 percent in 2020, to close at Kshs. 2.93 trillion from Kshs. 2.63 trillion in 2019.

Deposits maintained a strong growth trajectory, growing by 13.1 percent up from 8.3 percent in 2019 to close at Kshs. 4.11 trillion. This was reflective of asset reallocation in an environment of high uncertainty. Importantly, the deposits build-up during the year outpaced the growth in gross loans, leading to increased liquidity in the banking system.

In regards to the sector’s deposit to total liability ratio, it rose marginally to 88.5 percent in 2020, from 88.1 percent in 2019, showing the sector’s strong reliance on wholesale funding to cut costs on the liability side of the balance sheet.

Banking industry capitalization in 2020 remained adequate and strong. The total capital adequacy ratio rose to 19.0 percent in 2020 from 18.8 percent in 2019, above the statutory minimum requirement of 14.5 percent. This was supported by an increase in the total capital which outpaced the growth in total risk weighted assets during the period.

Furthermore, the industry financial performance in 2020 saw a modest growth in total income, rising total operating costs largely driven by increased expenses on loan loss provisions, reflecting increased cost to income ratio. The industry’s net interest margin dipped marginally as the cost of funding on average remained largely unchanged. In addition, the competitiveness of the Sector also improved.

However, the overall profitability in the sector fell in 2020, as profit before tax dropped by 30.9 percent, reflecting the lowest levels since 2012. There was also a reduced tax contribution of the banking sector. In 2020, the sector contributed Kshs. 42.4 billion down from Kshs. 55.4 billion in 2019, largely reflecting the depressing effects of the pandemic on incomes. While this represents a 23.6 percent drop in the tax contribution. Had the Sector not borne most of the weight of supporting other sectors of the economy, the Report notes that there would have been more contribution to tax revenue. 

In conclusion, the Report notes that the banking sector appears strong and will remain robust driven by enterprise and trade sectors.