Dollar Shortage Boosts Bank’s Non-interest Income – Report

The main source of a bank’s non-interest income is from foreign currency trading, revealing how lenders are benefiting from the ongoing dollar shortage.

Forex trading accounts for 39% of the bank’s non-interest income, according to a Pan African credit rating firm, Agusto &Co research on the Kenyan banking industry released on Tuesday.

The US dollar last traded for Sh139, down over 20% over the previous 12 months. The dollar is selling for up to Sh150 on the parallel market, traders informed one local daily.

Although the dollar issue is expected to last for the foreseeable future, according to Yinka Adelekan, group managing director of Agusto & Co., it will eventually pass by the middle of 2019.

This is dependent on a number of variables, including the CBK’s choice to allow banks access to the FX market.

“The recently introduced Foreign Exchange Code (FX Code) by the CBK is expected to enhance the regulations of the banking industry and improve the dynamics of the foreign exchange market by promoting responsible engagement of the players as well as mitigate the risks associated with the trade,” Adelekan said.

Banks are not allowed to engage in trading activities, quote prices, or complete transactions with the goal of influencing price movements or disrupting the market, among other things, according to foreign currency legislation.

Overall, the banking industry showed continued stability and toughness, with a total capital adequacy ratio of 19% in December 2022, exceeding the required level of 14.5 percent.

Similarly to this, the sector’s average liquidity ratio, which was 50.8 percent at the same time, was higher than the minimal regulatory limit of 20 percent.

From Sh6 trillion in December 2021 to Sh6.6 trillion in December 2022, the total net assets increased by 9.4%.

From Sh4.5 trillion in December 2021 to Sh4.8 trillion in December 2022, customer deposits climbed by 7%.

The rating company commended CBK for continuing to strengthen the Credit Information Sharing (CIS) system on the regulatory front.

This is in support of the banking industry’s ongoing adoption of risk-based credit pricing.

More crucially, the changes are meant to improve how well the CIS prices credit and increases access.

Credit Reference Bureaus (CRBs) will enhance the accuracy of their reports, strengthen the foundation of their credit scoring models, and align them with industry best practices in order to achieve this goal.

Additionally, CBK has reminded banks that while making lending decisions, they should also take into account the borrowers’ credit scores in addition to other things.

In 2022, banks and their clients suffered financial losses as a result of climate-related risks such as floods, droughts, and other natural disasters. This was due to a significant year-over-year decline in non-performing loans (NPLs) for sectors affected by climate change, such as energy and water (44.3%) and agriculture (44.1%).

An increasing need for Shari’ah-compliant goods and services (Murabaha, Ijarah, Musharakah, and Takaful), but there is a shortage of knowledge, expertise, and a thorough legal regulatory system.

Banks are investing more money in Environmental, Social, and Governance (ESG) frameworks, data collecting, and reporting tools in order to comply with international standards like the Task Force.

The capital and reserves held by the banking sector increased by 2.7% in the past year, to Sh917.6 billion from Sh893.7 billion in December 2021.

Increases in capital and reserves were seen across the board in peer groups.

Additional capital injections from commercial banks and retained earnings from the year’s profits are both responsible for the growth in capital and reserves.

The banking industry performed well in 2022, with earnings before tax rising by 22% to Sh240.4 billion from Sh197 billion in December 2021.

A bigger increase in total income (Sh92.7 billion) than in total expenses (Sh80.5 billion) was blamed for the improvement in profitability.

The percentage of the overall pre-tax profit attributable to the major peer group fell from 86.9% in 2021 to 86.7% in 2018.

The percentage of total pre-tax earnings allocated to the small peer group climbed from 0.8 percent in 2021 to 1.2 percent in 2022.

The percentage of total pre-tax profit attributable to the medium peer group fell from 12.3% to 12.1 percent in 2022.

According to the rating agency, the installation of a 20% excise duty on any amount charged in relation to lending by digital lenders may result in a drop in demand for those services.

“This is likely to trigger a shift towards traditional banking channels or a hike in the cost of digital lending services,” Adelekan said.