What is the Future of the Kenyan Banking Sector As 2016 Financial Results Trickle In?

One of the major questions that has been circulating among the economic experts in Kenya and beyond is; what is the future of the Kenyan banking sector? Will the Kenyan banking sector be able to withstand the wave of change coupled with various financial storms sweeping across the country?

Financial experts have said that the Kenyan banking sector is passing through a challenging environment that has never been witnessed before. They say that the prevailing environment might be a fulfillment of the scientific evolution premise of the ‘survival for the fittest’ where only the strong ones will be able to endure till the end.

Some banks have already released their 2016 full year financial results and the results seem to be taking some people by surprise. Almost all the banks that have released their 2016 financial results have witnessed a drop in their profits by a certain margin as compared to 2015. Before I give you the possible factors that might be contributing to commercial bank’s drop in full year results, here are some of the banks that have already released their financial results for the year ending 31^st December 2016:

1. Equity Bank Kenya recorded a 4 percent drop in profits after tax for the year ended 31st December 2015. The lender recorded 16.6 billion shillings in profits, a drop from 17.3 billion shillings in 2015.

2. Barclays Bank of Kenya released their full year financial results for the year ending 31st December 2016. The bank realized a drop-in profit by 10 percent to 10.8 billion shillings.

3. Co-operative Bank of Kenya, however, seemed to have beat all the odds to witness a rise of 8.5 percent in profits after tax for the financial results for year ending 31st December 2016.

4. Standard Chartered Bank (StanChart) on the other delivered 43.8 percent y/y growth in FY16 EPS to 25.85 (a better performance than the 7 listed banks that have announced).

On an article published on 24^th of March 2017, Soko Directory Investments Limited tried to dig deep into the whole issue of the interest rates capping law and how that law is affecting the profits of financial institutions in the country. The analytic titled ‘How Law Capping Interest Rates has Affected Profits of Most Banks in Kenya‘, it says in part, “Just months after the signing of the interest rates capping bill into law, the impact has started coming out as it is being witnessed by the 2016 full year financial results for some banks that have released their results.”

One of the main and obvious reason as to why banks are witnessing a drop in their full year financial results, therefore, is the coming into effect of the law capping interest rate to 4 percent below the Central Bank of Kenya rate. It has to be known that many banks were caught unaware with this law. Many banks thought that the President would be prudent enough and considerate of the economy and not to assent to the bill into law, but he did. In fact, on the first day of the effectiveness of the same law, commercial banks performed dismally in history of banking on the stock market.

Another factor that is hugely affecting the Kenyan banking sector is social media. The Kenyan banking sector is operating during the era of social media. Social, despite the fact that it is useful in building brands, if misused, its effects are lethal especially when it comes to banks. Some of the banks have already faced the pain of misused social media platforms.

Chase Bank for instance, went under receivership in 2016, in what the Central Bank of Kenya Governor Dr. Patrick Njoroge called the rumors peddled across social media platforms. The rumors on social media caused a panic among depositors and investors alike who took to mass withdrawal of their money from the institution leaving it to close shop. Actually, during that time, Chase Bank was literally chased out of the market by social media. The bank has since recovered.

Another bank that faced the storm of social media but remained strong and refused to back out was Family Bank of Kenya It is not easy to withstand a rumor shared widely across social media platforms but Family Bank was able to do it and it now back on the track. The issues on social media about Family Bank of Kenya attracted concerns from both the Statehouse as well as from Kenya Bankers Associations.

The wind of technology has been sweeping across the world and the Kenyan banking sector has not been spared. The banks have had to integrate their systems with technology to enhance their service delivery and also to remain at par with their competitors. If there are banks that are embracing technology then the list must be topped by Equity Bank, Co-operative Bank of Kenya and Family Bank of Kenya.

Everything said and done, some banks like Family Bank of Kenya will be releasing their financial results in less than a week time. How will the results look like? Sokodirectory predicts that the profits might be a little lower than those they witnessed in 2015 and we think it will be as a result of the prevailing interest rates cap law.