By Patricia Andago
The COVID-19 global pandemic has resulted in a dramatic fall in income and revenue for several businesses and individuals, rendering it difficult to perform loan obligations. As a result, most credit companies have become extremely cautious when issuing loans and have increased their provisions. Data from a new survey by the Kenya Bankers Association (KBA) shows that 72% of lenders are not willing to take on more risks at this time.
Bank profits are plummeting
In the Kenya Bankers Association’s survey, 94% of surveyed member banks reported having observed adverse effects as a result of the coronavirus pandemic. The circumstances caused by the pandemic have changed borrowers’ behaviour. To cope with increasing financial burdens, many have used up savings, minimised bank transactions, negotiated for loan restructures and are avoiding taking new loans.
Banks have had to adjust their operations, partly because of binding rules from the Central Bank as well as the need to maintain their customer base, and maintain a good public image.
“We made a promise that we would walk the difficult journey ahead hand in hand with our customers.We are therefore offering relief to our customers, upon application so that they are able to weather this storm that was unforeseen the world over.” – KCB Group CEO and Managing Director, Joshua Oigara
Non-performing loans are on the rise, and it is yet to be seen how fast and how far this will persist. Banks have reacted by restructuring loans given to both corporate and retail borrowers. Commercial banks have so far restructured loans worth at least Kshs 844.4 billion.
The Central bank’s removal of fees on mobile money transactions up to Kshs 1,000 has also drastically affected banks’ incomes. Standard Chartered Bank of Kenya revealed recently that they are losing Kshs 5 million of revenue monthly from the waiver of fees on bank-to-M-Pesa transactions. The removal of fees has recently been extended until December this year.
Some Kenyans are benefiting from the measures taken to curb the effects of Covid-19
Whereas the waiver of mobile money transaction fees is a thorn for the banks and mobile money providers, the Central Bank extension is a relief to many Kenyans, as it provides relief for families who need to send money to their loved ones, as well as MSMEs that often transact petty cash using mobile money. This has resulted in an all-time monthly high of 143.14 million mobile money transactions valued at Kshs 392.17 billion in June 2020.
Some borrowers have been proactively engaging lenders and negotiating the terms of their loan facilities. However, the majority are yet to do so, as only about 23% of individuals who are servicing loans have managed to successfully negotiate their terms. It is surprising to see that many borrowers are not having negotiation agreements at a time when lenders are not only willing but are bound by CBK rules, to make accommodations to their clients.
Not too many people are asking for loans at this time. Businesses and individuals who meet the bank’s minimum requirements are therefore getting bank loans easily.The industries that are thriving (for example, Personal Protective Equipment manufacturing and food supplies) can currently get loans at favourable terms, and expand their businesses further. Some banks may lower rates and extend payment deadlines for such promising clients, who are few at this time.
Individuals with a steady or growing income are also in a position to take up loans at favourable terms to grow themselves, as some already have. The government’s income tax adjustments have resulted in a higher net income for some individuals, giving them an added advantage when it comes to their ability to take up loans. In a study conducted by Odipodev, bank managers reported having given out some loans for home renovations and education programmes recently. Unfortunately, the benefits of loan uptake are a preserve for Kenya’s high and upper middle class citizens, who are much more likely to have steady or growing income at this time because of their education and experience levels, as well as their social networks. This locks out the groups of people with more urgent needs.
Some banks may have a good buffer to the effects of Covid-19
Larger banks have more substantial levels of capital and liquidity, which can sustain their funding to withstand the adverse effects of the pandemic. A US bank analyst, Saul Martinez reported anecdotal evidence that large national banks may be at an advantage.
At a time of crisis when the collapse of financial institutions is a possibility, top tier banks appear to be a safer option, and individuals and companies with no immediate use of cash are likely to deposit it in top tier banks(as opposed to second and third-tier banks). This further enables these banks to sustain lending to the thriving businesses and individuals mentioned above. However, banks with high exposure to the most affected sectors such as tourism, real estate, building and construction and trade, may have a challenge.
Regulatory forces can still do more…
The current fiscal policies to curb the effect of the virus tend to favour a certain segment of Kenyans, leaving out the majority who are actually the hardest-hit.
The Kenyan government can follow the lead set by other governments in providing relief measures that protect the common mwananchi. For example, Korea is increasing job seeker’s allowances for low-income households, India has reduced the tax deducted at source for non-salaried taxpayers, France and Korea are giving wage subsidies to people and businesses who have had to stay home to take care of children who are home from school.
In Kenya, local businesses are at high risk of closing permanently, and most banks are not willing to take further risks with these businesses. The government’s measures to protect MSMEs are not clear, as they allow for the restructuring of loans but do not remove the structural barriers that would pose a challenge in enabling small business owners to continue to access the financial assistance they need.
Some financial institutions have taken measures to support MSMEs during COVID-19, including IFC giving Kshs 5.4 billion loan to Equity Bank and Stanbic Bank Kenya giving loan holidays for SMEs.These efforts to keep local businesses afloat are plausible, but further regulatory measures need to be put in place to ensure optimal use of donor and government funds for the well-being of small business owners. Regulations should also emphasize accountability measures to prevent misuse of funds.
The role of banks is crucial to the recovery from Kenya’s economic downturn as a result of COVID-19. The government, central bank and financial institutions need to respond to the pandemic in a way that is inclusive and equitable, having a delicate balance in the protection of banks, businesses and families.
Patricia Andago is the product development lead at Odipodev, a data science and analytics firm operating out of Nairobi Kenya.
This work is supported by the Heinrich-Böll Foundation.