Bad loans burden puts pressure on Kenyan banks

The continuing build up of the bad loans burden is causing stress in a number of Kenyan banks, prompting the International Monetary Fund (IMF) to demand increased vigilance from the regulator.

The IMF says three commercial banks that hold 13 per cent of the total industry deposits are operating in a high risk territory as the global economic recession deepens and a slowdown of growth persists at home.

Banking sector insiders said the Central Bank has responded to the IMF’s concerns by inspecting a major international bank and introducing additional reporting standards for non-performing loans that are seen to be the industry’s soft belly.

Though involving only three out of Kenya’s 45 commercial banks, instability of any one player is always seen as a market-wide problem because of the risk of contagion – the spread of instability among institutions that do business with each other.

Without mentioning the institutions by name, the IMF warns that in the coming months, institutions exposed to tourism and export earnings will come under increasing stress and recommends that regulators remain on high alert.

Mr Peterson Mwangi, the managing director of Afrika Investment Bank, said news of three institutions being close to the minimum Capital to Asset Ratio (CAR) was “distressing” especially at this time when the capital market is in a confidence crisis.

“It is however unlikely that any of the large banks are involved because they control a larger fraction of the sector’s assets than the 13 per cent mentioned by the IMF,” he said.

The top five banks including KCB, Barclays, StanChart, Co-op and Equity control 51 per cent of the industry’s total assets, according to CBK data for the first quarter of 2009.

Mr Chris Gacicio, the personal assistant to the CBK governor, said the IMF report was based on the 2008 performance of commercial banks and that capitalization of most banks had improved since then.

“All prudential ratios within the banking system are healthy, liquidity, capital adequacies are above the statutory minimum required,” he said.

To assess the health of commercial banks, the IMF used CAR which measures the level of capitalisation against its total assets.

The higher the ratio the more stable a bank is. Kenyan banks have a minimum of 12 per cent CAR. High capital to asset ratio means an institution is better protected against operating losses than those with lower ratios.

Source: www.businessdailyafrica.com

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