Is Kenya’s Economy Dying Due to Struggling Banks?

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.

Profit warnings

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.

The two banks joined ten other NSE listed firms that had issued profit warnings. The firms included:

• BOC Gases
• ARM Cement
• Uchumi Supermarkets
• Mumias Sugar Company
• Express Kenya
• East Africa Cables
• Standard Group among other companies.

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: