Kenya Bankers Association Head gives an Overview of Kenya’s Banking Sector.

Advocacy for the banks is the key mandate for Kenya Bankers Association (KBA). Our policy articulation is backed up with research. Our other mandate is to steer efficiency in the banking sector. - Dr Habil Olaka, CEO KBA

Innovation in the banking space is another role that the association is tasked with. PesaLink, a product developed by Integrated Payment Services Limited, a subsidiary of KBA is one of their great achievements. It is an innovation in the payment space that Dr. Habil Olaka, CEO, KBA notes that it will be most preferred by banks and customers in the next five years; it will be a game changer in the payment space.

KBA also launched sustainable finance initiative to ensure banks have at their core sustainability from an environmental, social and economic perspective. This is geared at seeing ways in which people can raise appropriate funding to support sustainable finance initiative.

From where he sits, Dr. Habil has both a panoramic and aerial view of the banking sector, and industry he has been in for 13 years now. Few in the sector have had the privilege of having an overview of the sector. He compares the industry’s growth phases and undoubtedly, Dr. Habil reckons significant changes have taken place.

“2017 was a difficult year more for the banking sector. There was a drought that affected food supply, prolonged electioneering process; the impact of capping bill was strongly felt.”Notes Dr. Habil.

Just like most players in the banking sector, he sees a ray of hope, “We look at 2018 with optimism. The rains this year are encouraging, food supply has gotten adequate, elections are now behind us and the government is in place with big four agenda and we hope something will be done about the interest rate cap law.”

Dr. Habil is quick to point out one fact; that the economy has not yet shot up yet and the pickup is not guaranteed. He notes that the unpredictable policy environment, the legislative aspect of it where a law can spring up from nowhere and before assessing the implication it is already a law is a factor to worry about. “Once a law is enacted it is a whole process to be reversed. Some of the laws come in place and affect every sector.” He explains.

He is among the many players who are optimistic that there will be a repeal of the interest rate law cap. “There are two aspects, possibly the treasury may come with legislative proposal.” He states. The law as it is not solving the problem of the cost of credit being expensive. The law aimed at bringing down the cost but has reduced availability of credit. Entities that have been rationed out of the market are the ones with higher risk; individuals, SMEs and the retail sector.

“We also have the crowding out effect, treasury bills and treasury bonds have been fairly attractive, given the risk adjusted return on t-bills and t-bonds to banks. The first step would be to be repealed then address the issue of cost of fund in the market, if it comes down, then cost of credit can come down. If the t-bills rates were to be brought down, it would address the crowding out effect. Banks would demand less from consumers.” He explains

The Credit Information Sharing program (CIS) enables banks price risk based on available information. With this banks will not perceive all people to have the same risk. The ideal value of CIS is that the good borrowers can use their track record to bargain for the interest rate on a loan

The Annual Percentage Rate framework (APR) has enhanced transparency. It is measure where all other cost that goes into the credit is shown other than only the interest rate. Dr. Habil notes that all banks are coming on board to use the framework. This aims at transferring power to the consumer who can check the rates from their phones and discuss with the bank they select. “There is need to promote transparency in the banking sector, so that a consumer can choose an appropriate bank to take a loan from.” He adds.

Currently, credit is being accessed outside the banking system and informal lenders are the ones punishing borrowers, the lack of discipline is being perpetrated by the informal lenders.

The implementation of IFRS 9 compounds the existing problem of the interest rate law cap. In IFRS 9 you anticipate the expected default and you provide for it immediately. The riskier market attracts more provisioning. This is the sector that is expected to be more affected. Banks would prefer to go for individuals who are least likely to default.

From where he sits, Dr. Habil notes that under IFRS 9, there are areas that are not clear, such as whether banks are expected to make provision for t-bills and t-bonds since governments are not known to default domestic borrowing since they can print the money and borrow. On the other hand governments have been known for defaulting foreign debts and have actually defaulted. “The likelihood of default is low but not zero, what per cent should we do the provision?” He says.

Expected loss and incurred loss will differ. “Through modelling the loss you anticipate from the loan is what you are required to book, in the event you overbooked, you release the provisions but you will have booked provisions when the loan is disbursed. It can deviate positively or negatively.” He adds.

The present portrayal of banks not having thought through their business models easily blindside the efforts banks have put to see to it that they are cost efficient and have been deliberate at promoting financial inclusion. The man who has been there to oversee it all for the last seven years and eight months maintains a clarity of though as he explains the transformational journey.

He points out that in regard to cost efficiency; banks have been doing it even before the introduction of the interest rate cap law. “The country has made great progress in terms of financial inclusion. Some years back, only 25 per cent was included, in 2016, only 23 per cent were excluded. This was contributed to by mobile and agency banking. Banks were able to access customers in the remote areas through agency banking even though the services are limited. In mobile banking, banks are leveraging on mobile networks. This change of model was in the minds of banks, the law just accelerated relooking at the mobile.” He elaborates

Tracking mobile and agency banking, it is 5 years since it was introduced but some have not even started. “A lot more needs to be done but agency banking is growing. This growth is being driven by few players who have networks across the country. Led by those banks that are ahead, other banks have picked up doing mostly mobile banking.” He notes.

M-PESA popularized the idea of transacting via mobile. Customers ask whether you can transfer money between the bank account and M-PESA or Airtel. There is room for mobile and agency banking. There is another concept on giving a customer is given many channels through which they can reach the banks; internet, branch, ATM, mobile, agency. Fin techs are bridging what banks are offering and what customers appreciate and find convenient.

“You will see partnerships between banks and fin techs and banks forming fin techs to provide seamless service to the customer.” He predicts

Being in the banking industry for financial services industry for about 20 years, he reckons how M-Pesa was viewed on introduction. “Banks viewed M-pesa as a competitor initially who is not regulated as the banks are. M-pesa was not playing a banking role but enabling people transfer money from one point to another. It is a payment system not a banking system. Banks went into partnership with Mpesa. They have a symbiotic kind of relationships. Fin techs re likely to go through the same kind of process. They may end up leveraging on each.” He further predicts.

Being in at the core of introduction of PesaLink, he has a clear report on the product. “It is an issue of bringing players to understand the long term impact. The bank charges Ksh 300 for EFT and Ksh 500 RTGS. With PesaLink, you can transfer Ksh 1,000,000 at a fraction of the cost, in the range of Ksh 10. Banks have given their departments different targets to meet in EFT and RTGS transaction. PesaLink needs to be driven from the top, volumes generated from it can be able to sustain it despite it bringing low income. We wanted to bring transaction cost down so that even consumers get low cost for transaction and feel the impact of cost coming down.” He notes.


At KBA, there are three categories of membership; ordinary, associate members and honorary member, where CBK is the only member. The amount of bank contribution depends on membership. Incidents of fraud have been on the rise with the advancement in technology. Banks are leveraging more on technology to drive efficiency and make processes more secure. Through automation it is easier for fraud to happen. Cyber criminality is on the rise and the level of detection has been enhanced. A number of banks including the regulator are ensuing that risk mitigants are enforced to ensure that banks have robust banking systems.


“There is framework of information sharing because fraudsters use similar approaches. Ensure you have the right people, at the vetting process, put the right measures. Banks are working on that so that they have the right people who also will not have the incentives to commit the same. If you mistreat somebody, they can result to committing fraud to punish you. Detection mechanism is a notch higher, information is available on typologies being used to commit fraud, how many have been stopped and how many have gone through.” Dr. Habil points out.

The collapse of Imperial Bank in October 2015, Dubai Bank in August 2015 and later Chase Bank in April 2016 because of poor corporate governance made Kenyans loose trust in the lenders. CBK governor has been focusing on transparency and governance and fair play since 2016, this is the new normal framework. “The bottom line is that we realized as an industry that action of individual entities affects the whole banking sector. Profiling of banks started “small banks are not good.” “Asians banks are not safe”. We learnt our lesson and focused on keeping each other accountable. We came up with KBA charter to enable self regulation in the banking sector.” He further states.


The head honcho of KBA views the Central Bank of Kenya (CBK) governance to be proactive. When the CBK governor, Dr. Njoroge came into office in July 2016, before the end of that year, he identified bank supervision department needed a lot of work. “He went right in there and did significant changes from the leadership department because he knew its significance. This change began to be felt. The effect of these changes was to put some of the banks under receivership. They have their grip well in terms of supervision of banks. This is the key role of CBK.” He states. He adds that in regard to monetary policy, they have handled this pretty well. There is a level of confidence that they will steer the industry to greater heights.


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