Only the most innovative financiers will survive 2015

The financial services sector this year has been shaped by several key events most of which were meant to enhance stability and transparency in the market.

Some of the key ones include commercial banks’ compliance with capital adequacy ratios as per Central Bank prudential guidelines, introduction of the Kenya Bankers Reference Rate (KBRR) and the Annual Percentage rate, an increase in capital requirements and compliance with the capital reserve ratios (CRR) by microfinance banks.

It is also a year where mobile transactions have reached record highs far exceeding transactions made through electronic payment cards.

The shilling has also registered several three year lows on account of decline in tea and tourism earnings. This is also despite the massive drop in international oil prices, a situation likely to persist in 2015.

The Central Bank and the Kenya Bankers Association released a new pricing formula for interest rates, the Kenya Bankers’ Reference Rate (KBRR) priced at 9.13 per cent on which commercial banks would price their loans and the Annual Percentage Rate (APR) detailing the total cost of credit.

More than 1.2 million loan accounts were by October 19 this year priced under the KBRR framework against total loans of over 4 million.

INTEREST RATES

Also, despite optimism that interest rates could decline this financial year supported by the new loan pricing formulas and the Eurobond money in the economy, the rates are still high and are likely to rise in the next one year to stabilise the shilling according to Mr Benard Omenda, the head of Treasury at Equatorial Commercial Bank (ECB).

He says CBK may raise the CBR, which has been left unchanged at 8.5 per cent for the ninth session in a row on November 4.

Analysts indicated the issuance of the Eurobond and its timing was a deliberate plan to increase liquidity in the domestic market by easing pressure on the Treasury bill auctions.

They, however, noted that even with the Eurobond money in the bank, it will take time before interest rates go down.

Months after enacting of a new microfinance law that raised the capital of deposit taking microfinance to Sh200 million from Sh60 million and being allowed to operate current accounts and engage in foreign exchange business, the institutions were slapped with yet another regulation.

The nine microfinance banks, namely Faulu, Rafiki, U&I, Remu, SMEP, Uwezo, Century, Sumac and Kenya Women microfinance banks, were now required to deposit an amount equivalent to the cash reserve ratio of 5.25 per cent with the Central Bank.

The move was meant to level the playing field now that they were operating just like commercial banks that comply with the rule.

Despite the rule getting the microfinance flat footed, the institutions said they would comply but that would constrain them in terms of lending to their customers as most of them solely relied on customer deposits for lending. Despite the regulatory gains, this directive would constrain the micro lenders loan books going forward.

“They would require a lot more money to make the same amount of money they have been making in the absence of the CRR requirement,” Mr Omenda said.

In a bid to meet the capital adequacy ratios, commercial banks are also frantically raising money to be at par with CBK’s guidelines on prudential guidelines.

“This has put more pressure on banks in meeting the requirements in line with growth in the sector,” Mr Omenda said. The commercial banks also continue to grapple with growing non-performing loans that have hit Sh100 billion as at the end of August. Bad loans may continue growing in 2015 owing to poor performance of the tourism and hotel sector, poor tea prices and delays in payment to contractors by the government and security threats in the country that may slow down the economy.

According to Paul Mwai, chief executive officer of Afrika Investment Bank (AIB), the banking, insurance and investment sectors have registered significant growth in 2014. However, he reckons the insurance and banking sector growth may slow down next year due to increasing competition.

This may require them, especially commercial banks, to identify new growth areas and roll out new products as the traditional products like loan issuance, charging fees and commissions mature.