East Africa: Banking Sector to Remain Profitable in 2012

THE Banking sector is expected to sustain its growth momentum this year despite the high interest rate environment in the first half of this year, a Central Bank report on stability of the country’s financial sector shows.

The industry’s growth will largely be driven by adoption of cost effective delivery channels and increased presence of Kenyan banks in the East African Community partner states and South Sudan.

As at 31st December 2011, the banking sector comprised of the Central Bank of Kenya, as the regulatory authority, 43 commercial banks, one mortgage company, four representative offices of foreign banks, 6 deposit-taking microfinance institutions, 118 forex bureaus and two credit reference bureaus.

“The downside risks of growth prospects, inflationary pressures and the resultant high interest rate regime are expected to abate in the course of the year ,” CBK says in the Kenya Financial Stability 2012.

According to the report, the banking subsector registered enhanced growth in year 2011 with total net assets growing by 20.4 per cent from Sh1.6 trillion in 2010 to Sh2 trillion in 2011.

Loans and advances, government securities and placements accounted for 57 per cent, 15.1 per cent and 5.8 per cent of total assets, respectively. Net Loans and advances grew by 31.4 per cent, with bigger share going to personal, trade, manufacturing and the real estate sectors.

However, investment in government securities declined from Sh443.4 billion in 2010 to Sh380.4 billion in 2011, which may be due to low return on paper in the first half of 2011 compared to lending rates.

“Towards end of 2011, banks could not invest in Treasury bonds due to high rates, affecting valuation of bond portfolios and leading to trading difficulties,” the report says in part.

The source of funding in the banking sector, mainly customer deposits grew by 20 per cent fromSh1.2 trillion in 2010 to Sh1.5 trillion. The growth was supported by branch expansion, agency banking and receipts from exports.

For the year, gross non-performing loans declined by 8 per cent from Sh57.6 billion in 2010 to Sh53 billion in 2011. As a result, the ratio of gross non-performing loans to gross loans improved from 6.3 per cent by end December 2010 to 4.4 per cent as at end December 2011.

The decline in gross NPLs was attributable to write-offs, recoveries and improved credit appraisal monitoring standards, especially with licensing and operationalisation of credit reference bureaus.

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