Nairobi 2nd August 2022 – The banking industry in Kenya remains strong, underpinned by adequate capitalization and liquidity levels, the continuing banking sector’s robust approach to treatment of asset quality deterioration and continued implementation of efficient and resilient business models. Despite this, the sector was keen to monitor the evolution of some emerging risks, from rising inflationary pressure, concerns of public debt sustainability, fragile economic recovery, and volatilities in both global and domestic financial markets.
As reported by the Kenya Bankers Association’s (KBA) State of the Banking Industry (SBI) Report 2022, the industry financial performance in 2021 was robust, reflecting a sustained growth in total operating incomes amidst a decline in operating costs yielding a reduction in the cost to income ratio.
The industry’s net interest margin improved to 6.5% during the year up from 6.3% in 2020. Overall profitability of the banking sector recovered, as average return on assets and return on equity edged up to 3.3% and 22.1%, from 2.0% and 13.3% in 2020, respectively. The improved profitability reflected recovery of the economy from the depressing effects of the pandemic.
The banking sector total assets also expanded in 2021 by 11.4% to Kshs. 6.0 trillion from Kshs.5.4 trillion in 2020, driven mainly by growth in investments in government securities and private sector gross loans that together accounted for 78.3% of the total assets. The notable changes in asset structure reflected portfolio adjustments during the period aligned to the modifications in the operating environment and individual banks’ strategies.
In his remarks during the report’s release today, KBA Chief Executive Officer, Dr. Habil Olaka said ….”the banking sector depicted unprecedented resilience to post strong and adequate liquidity and sufficient capital positions that allowed it to support other sectors with significant loan restructures and continued loan extension,”
Banking industry capitalization in 2021 was resilient, depicting adequate capitalization well above statutory limits. The industry’s total and core capital adequacy ratio were strong at 19.5% and 16.5% in 2021 compared to 19.0% and 16.6% in 2020; both above the respective statutory minimum requirements of 14.5% and 10.5%. This was supported by an increase in the capital which outpaced the growth in total risk-weighted assets during the period.
The banking system deposits maintained a strong growth trajectory, growing by 12.2% to Ksh 4.6 trillion in 2021; a deposits buildup that outpaced the growth in gross loans. The industry asset quality in 2021 improved slightly, with the ratio of gross Non-Performing Loans (NPLs) to gross loans declining to 14.1% from 14.5% at end 2020, reflecting a slower growth in NPLs than the growth in gross loans. The reported growth in NPLs was attributed to the protracted adverse effects of the pandemic on households and firms’ incomes, that saw NPLs grow to Ksh. 460 billion up from Kshs. 436 billion as at end 2020.
KBA Research and Policy Director, Dr. Samuel Tiriongo said: …“Measures of concentration across key bank lending and deposit markets point to gradually decreasing levels of market concentration, supported by increasing digitization of financial services. The industry’s concentration, measured by the Herfindahl-Hirschman Index (HHI) rose to 767.31 in 2021 from 736.20 in 2020, indicating a competitive market structure’’.
The KBA-SBI Report is an annual publication of the KBA Centre for Research on Financial Markets and Policy® aimed at contributing to the understanding of the Kenyan banking industry and its interaction with other economic agents. In compiling this year’s report, the Centre drew from a database of bank-level audited financials spanning the period 2003 to 2021.
Attention to KBA Director of Research and Policy
Phone: 20 2221704/2217757/2224012