Just How Banks did Kenyan Banks Make Profits Despite the Interest Rate Cap?

Top Kenyan banks retained massive profits for the financial year against the stay of the depressive interest caps in the last three years by reigning on costs to widen the margin for higher earnings.

An investor notes by the global credit rating agency, Moody’s, at the end of last week opens the door to reveal the continued growth in earnings by the local lenders against a tide of held down interest-earning scope.

According to the update which analyses the performance of three tier 1 lenders including Equity, KCB and Cooperative, Kenyan banks edged the hold on rates by maintaining favourable cost to income ratios and lower loan-loss provisioning costs to better the performance of peers in Nigeria.

Further, the domestic banking outfits hold higher net interest margins [NIMS] from servicing high-margin retail clients such as small and medium enterprises. Combined, the three banks score an average cost to income ratio [CIR] of 49% from the past four years while holding a weighted net income return of 3.7% over definite assets in the period. In effect, the banks are essentially spending a mere 49% for every shilling in income earned to mirror the attained efficiency.

Moody’s attributes the strengthened position in the sector’s income growth to the deep penetration of financial services in the country with Kenya sitting at the helm of driving financial inclusion on the continent.

The increase in NFI is meanwhile attributable to the high asset turnover for local banking products with multiple loans being disbursed each year to earn a fee each time. The better margins are enhanced by lower loan-loss provisioning costs with the three banks holding a low 0.9 percent of loan loss provisions to gross loans.

At the backend of the quality balance sheets by local banks is ongoing investments into digitization to optimize the lending business through the targeting of even lower costs to income over the medium term. The grand investment into technology is however part of the lenders key frailties as the expenditure leads to higher amortization and depreciation costs.

According to the Kenya Banker’s Association [KBA], the stay of interest caps saw off the shipping out an estimated 5000 jobs from the industry. The recent lifting of the interest capping law is however expected top result in the gradual increase margins to see even higher earnings by banks.