Impact of COVID-19 on commercial banks in Kenya.

In 2019, before the advent of the COVID-19 pandemic, the economy was already showing signs of slowdown, despite that, most commercial banks returned good results in the circumstance.

Non- performing loans (NPLs) was growing but not at an alarming rate and could partly be explained by adoption of IFRS 9 that ensured that clients with intermittent repayment history were downgraded to stage 2 as per the new requirements. Overall, the industry has been having sufficient levels of liquidity which could easily support credit growth, but banks remain risk averse on the prospects of a moribund economy last seen in the 90s up to 2002. In fact, prior to interest rate capping, credit growth was good and it was possible to estimate the GDP with a reasonable level of accuracy.

 

However, since the beginning of this year the COVID-19 pandemic ensued and all economic growth models have been tossed out of the window. The global supply chains and trade have experienced severe disruptions as countries grapple with how to contain the spread of COVID-19. Kenya was not immune to this and by mid-March the country went on curfews and lockdowns as a mitigation against the spread of the viral disease. It is instructive to note that the virus has badly exposed an ill prepared public health care system that has been underfunded, neglected and engulfed in wanton wastage. That is not the purpose of this article but suffice to say that physical health of the population and trade are very important in economic growth. A vibrant and growing economy is critical to the health of a sound monetary and financial system.

 

We examine some of the policy responses that the Central Bank of Kenya (CBK) has pursued and argue whether they have been effective in ameliorating some of the adverse effects of the COVID-19 pandemic.

 

The cutting of the Central Bank Rate (CBR) can be ignored as a policy response since the Monetary Policy Committee (MPC) was already in a loose policy stance prior to the pandemic for reasons mentioned at the beginning.

 

CBK informed the public that they could renegotiate the loan repayment terms with their banks up to a period of one year. Thus, clients could get a moratorium on principal and interest payments or both depending on their circumstances. There was a caveat in that only loans that had been performing up to beginning of the pandemic in March this year qualified. It is not clear what will happen at the end of one year given that no one knows when the virus will be brought under control. This lacuna leaves room of regulatory over reach to the detriment of the banks. There is need for a more consultative approach so that all parties have a clear path of action with no room for uncertainty.

 


CBK also instructed that mobile transactions below one thousand shillings be done at zero cost to reduce the use of cash, no cost for mobile wallet to bank account and vice versa transactions as well as increasing the daily transaction limit from one hundred and fifty thousand to three hundred thousand shillings.

 


The Cash Reserve Ratio (CRR) was also reduced from 5.25% to 4.25% in order to increase the amount of disposable cash to the commercial banks. This can be seen as both a short term and long-term measure since it is one of the monetary tools available to CBK for conducting policy.

 


Banks were also ordered not to pay out dividends with a few exceptions and preserve capital for the future.

 


It is important to note that while all these measures are positive for bank customers and the economy at large, they mostly involve the sacrifice of banks and other financial service providers like mobile payment service providers. In the short run, the call to patriotic duty of care to fellow citizens but at the end of the day, there has to be a balance between free and reasonable cost. Asking commercial entities to forgo revenues may be counter productive since there are costs associated with service provision. Wages have to be paid, infrastructure has to be maintained and shareholder value has to be preserved.

 


Declarations by fiat is simply not the way to go as it amounts to regulatory over reach mentioned earlier. Consultation and consensus would have been a more reasonable approach that inspires confidence to all stakeholders. Apart from instructing commercial entities to extend free services, one would expect CBK would have established a SME (Small and Medium Sized) fund that would be available to SMEs to tap into for this period. The administration of this fund could be in the form of credit guarantees or direct channeling of funds so that SMEs access working capital required to continue operating. This would have prevented the numerous business closures and layoffs that have been witnessed during this period.


 
Indeed, during the latest MPC meeting, CBK indicated that loans amounting to about 680 billion shillings or 23% of all outstanding loans have been restructured. This is quite indicative as sectors like tourism, transport, real estate and trade services have ground to a halt. It is just a matter of time before we start having the big corporates and banks requiring financial support.

 


CBK paying dividends to the government to shore up the COVID-19 fund at a time when it is asking banks to preserve capital sent the wrong signal to the industry. SMEs need direct cash infusion apart from relaxed credit terms. This is because restructuring deals with past consideration while cash infusion enables them keep going until the economy stabilizes. Most SMEs that have closed will simply not reopen when the new normal resumes. Actually, conventional monetary policies do not work during a pandemic and the CBK could be more proactive by leading from the front by committing its resources to the economy.

 


There have been suggestions that it can even print money to stimulate demand in a contracting economy. However, we should be careful in preserving the purchasing power of the Kenya shilling given that we as a country have substantial foreign currency denominated loans.

 


While the decision to require banks to freeze dividend payouts seems sound on the face of it, one is left wondering what informed it. Was it as a result of some robust credit stress testing on institutions? How long can the industry withstand these relaxed credit terms before a crisis erupts? These are important questions that have not been adequately addressed and CBK should in their next MPC meeting tackle them. It is also time that past minutes of the MPC are published as is the current practice in other jurisdictions. This is important for transparency and enhancing confidence in the CBK as a public institution. Indeed, the COVID-19 pandemic presents the CBK with an opportunity to do some “out of the box” thinking, that is going to shape the industry in the years to come.

 


Even before the onset of COVID-19 pandemic, banks were already restructuring loans as a result of a slowing down economy. Job losses have led to increased defaults in the personal loan portfolio and the current pandemic only amplified the situation. Other sectors of the economy have also been struggling and it was just a matter of time before the situation got out of hand. Many years of robust real estate growth have left banks with expensive collateral in a slow economy. The resilience of bank balance sheets will be severely tested given the situation and in case of litigation, the slow, expensive and tedious wheels of justice. A more worrying situation is the legal status of these collateral given that some of the collateral may have been built on public land with little recourse for lenders.

 


CBK can help lenders by engaging other arms of government to ensure that lenders are protected from rogue public entities acting with impunity. In case a property is properly charged, the government should cover the lender in case the title is revoked. Without some consequence to the government, these theatrics will continue to the detriment of banks.

 


Finally, devolution has been around for almost eight years but it is time to question how CBK is supporting it. Monetary policy actions have been applied at the aggregate level that the situation is very cloudy. Will CBK structure also be devolved along the lines of the Federal Reserve Bank of the US? It must be appreciated that the country’s economy is diverse and different regions have varying needs. Unless CBK also supports devolution directly, Nairobi will continue controlling the country’s resources because of its position as the political capital. It is time to move away from the current system and evolve a more equitable financial system that is fit for purpose. This is a legacy that the current CBK governor can pursue and claim credit for.

 

History remembers bold men and women who alter its course during moments like this one.

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