How can a country operate in the absence of financial institutions? Financial institutions, more specifically banks, are of great importance to any given country.
In the absence of banks, where would people borrow money from? What would you do with your savings? Would you be able to save/borrow as much as you need, when you need it, in a form that would be convenient for you? What risks might you face as a saver/borrower?
Banks provide us with financial intermediation, which is the process of taking in funds from a depositor then lending it out to a borrower. Banks accept deposits and make loans and derive profits from the difference in interest rates paid and charged to depositors and borrowers respectively.
Banks tend to be vital institutions to any given country as they significantly contribute to the development of the economy through facilitation of businesses. These institutions facilitate the process of saving plans and are instruments of the government’s monetary strategy.
Credit provision by banks fuel economic activity by allowing businesses to invest beyond their cash at hand. Households to purchase homes without saving the entire cost in advance and governments to smooth out their spending by mitigating the cyclical pattern of tax revenue and to invest in infrastructure projects.
Businesses and households need to be protected against unexpected need for cash. This is where banks step in with liquidity provision. Banks are main direct providers of liquidity, through demand deposits and by offering lines of credit. Furthermore, banks together with their partners lead the financial markets offering to buy and sell securities and related products, in large volumes and with relatively modest transaction costs.
Financial institutions are key in promoting entrepreneurship in any country. This is achieved through increasing private participation in economic development. The role of the private sector is crucial in accelerating growth of any economy. Banks therefore make access to loans easy to entrepreneurs on reasonable interest rates. Expansion of the financial sector encourages entrepreneurs to make investments.
Loans are at all times made available to different key sectors in a country for instance, agriculture, trade and industries. They tend to make direct investments in these sectors thus facilitating the process of economic development.
Therefore, banks are crucial for the economic development of any given nation, but what happens when banks start issuing profit warnings? What is the impact of such warnings to the economy of the country?
Two Kenyan banks have already issued profit warnings meaning that their shareholders are likely to go home empty handed once the financial results are released. When banks issue profit warnings and yet they are the sole custodians of money from their customers then people have a reason to worry.
National Bank of Kenya issued a profit warning on Wednesday saying that its earnings for 2015 were likely to go down by at least 25 percent and blamed the outcome on bad loans as well as high interest rates. Thursday, the bank released its full year financial results and registered a loss of 1.2 billion shillings.
National Bank of Kenya during its last year financial release reported pretax profit of 1.3 billion Kenyan shillings, down 28 percent hurt by costs stemming from lay-offs and the stakeholders are really worried.
Another bank that has issued a profit warning is the Stanchart Bank which has said that its profits are likely to fall by more than 39 percent after tax. In 2014, the lender reported a profit of 6.3 billion shillings which was a drop from 10.4 billion shillings in the year 2014. The bank also blamed the increase in non-performing loans as well as an increase in the interest rates that forced potential customers to shun away.
|BANK||PROFITS||CHANGE IN %||L0SS Recorded/ Expected|
|STANCHART||PROFIT WARNING||39||2.4 Billion (expected)|
|NBK||PROFIT WARNING||25||1.2 Billion|
The two banks joined ten other NSE listed firms that had issued profit warnings. The firms included:
Other financial institutions that have released their annual financial results have registered profits, but very few of them have indicated a positive deviation from the previous profits as shown in the table below:
|Bank||Q3 2015 rank||Profit/Loss|
|Standard Chartered||5||6.3bn (-2.4bn) expected|
|Co-operative bank||6||11.71bn (+ 3.7bn)|
|CfC Stanbic||9||7.35bn (-4.4%)|
|National Bank of Kenya||10||1.2bn (-25%)|
Almost all the banks have blamed non-performing loans for their financial woes. What exactly is the impact of non-performing loans to banks?
The high level of non-performing loans continues to be an issue of concern in the country. It keeps increasing steadily.
The best banks known to have good lending policies and processes still fall victims of non-performing loans in one way or another. The magnitude of non-performing loans worry bank policy makers as such loans have made some banks fall into liquidation and even closure.
Some of the banks that have been affected by non-performing loans in the country include Stanchart Bank and Commercial Bank of Kenya.
Creditors are of great importance to any financial institution thus, they get affected by non-performing loans due to banks ending up facing financial losses and operational losses thus affecting profitability on creditors.
Lack of proper monitoring and control of non-performing loans affects profitability through provisions that are made by banks in the country. Non-performing loans equally affect investors as their returns on investments is highly affected hence leading to low or even no returns at all on their investments.
Management consultants need to step up and advise on the best investment decisions based on not only financial losses position but equally considering the inherent non-performing loans as they tend to impact on the profitability of banks. Various stakeholders get affected by operational in the banking sector.
Kenya Revenue Authority on the other hand failed to reach its target twice by 28 and 47 billion shillings respectively. What happens when KRA fails to reach its target? It means the government will has insufficient funds to direct its performances. That also implies that the government will have to seek for loans from financial institutions and if the financial institutions have no sufficient money, the government will get no money. When banks issue profit warnings, it means they will have insufficient funds to give out loans to the government.
The question, therefore, is, is the Kenya economy dying?
Article by Juma Fred, Vera Shawiza.