CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2020 1 TABLE OF CONTENTS VISION STATEMENT V THE BANK’S MISSION V MISSION OF BANK SUPERVISION DEPARTMENT V THE BANK’S CORE VALUES V GOVERNOR’S MESSAGE VI FOREWORD BY DIRECTOR, BANK SUPERVISION VII EXECUTIVE SUMMARY IX CHAPTER ONE STRUCTURE OF THE BANKING SECTOR 1.1 The Banking Sector 2 1.2 Ownership and Asset Base of Commercial Banks 4 1.3 Distribution of Commercial Banks Branches 5 1.4 Commercial Banks Market Share Analysis 5 1.5 Automated Teller Machines (ATMs) 7 1.6 Asset Base of Microfinance Banks 7 1.7 Microfinance Banks Market Share Analysis 8 1.8 Distribution of Foreign Exchange Bureaus 10 CHAPTER TWO DEVELOPMENTS IN THE BANKING SECTOR 2.1 Introduction 12 2.2 Banking Sector Charter 12 2.3 Legal and Regulatory framework 12 2.4 Consolidation, Mergers and Acquisitions, New Entrants 12 2.5 Medium, Small and Micro-Enterprises (MSME) Support 13 2.6 Coronavirus (COVID-19) pandemic: 13 • Measures to Mitigate the Impact of COVID-19 Pandemic 14 • Impact and Outcomes of COVID-19 Mitigation Measures 15 2.7 Developments in Information and Communication Technology 15 2.8 Mobile Phone Financial Services 22 2.9 New Products 23 2.10 Operations of Representative Offices of Authorized Foreign Financial Institutions 24 2.11 Surveys 2020: 25 • Residential Mortgage Market Survey 2020 25 • Micro, Small and Medium Enterprises (MSME) Survey 2020 27 • Innovations Survey 2020 30 2.12 Innovative MSME Products by Banks 32 2.13 Employment Trends in the Banking Sector 32 2.14 Future Outlook 32 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2020 I TABLE OF CONTENTS CHAPTER THREE MACRO-ECONOMIC CONDITIONS AND BANKING SECTOR PERFORMANCE 3.1 Global Economy 34 3.2 Regional Economy 34 3.3 Domestic Economy 35 3.4 Inflation 37 3.5 Exchange Rates 38 3.6 Interest Rates 38 3.7 Balance of Payments 39 3.8 Fiscal Developments 39 3.9 Performance of the Banking Sector 40 3.10 Commercial Banks Balance Sheet Analysis 40 3.11 Sectoral Distribution of Gross Loans, Loan Accounts and Gross Non-Performing Loans 41 3.12 Asset Quality 43 3.13 Capital Adequacy 44 3.14 Liquidity 44 3.15 Profit and Loss 44 3.16 Performance Rating 45 3.17 Compliance with Supervisory and Regulatory Requirements 46 3.18 Performance of Microfinance Banks 47 3.19 Agency Banking 48 3.20 Credit Reference Bureaus 50 3.21 Money Remittance Providers 51 CHAPTER FOUR DEVELOPMENTS IN SUPERVISORY FRAMEWORK 4.1 Introduction 55 4.2 Proposed Amendments to the CBK Act 55 4.3 Host Country Assessments 55 4.4 Developments in Anti-Money Laundering and Combating Financing of Terrorism 56 4.5 International Financial Reporting Standards 57 4.6 Developments in Digital Lending/Credit 58 CHAPTER FIVE REGIONAL AND INTERNATIONAL DEVELOPMENTS AND INITIATIVES 5.1 Introduction 61 5.2 Regional and International Initiatives 61 5.3 Kenyan Banks Regional Footprint 69 CENTRAL BANK OF KENYA II BANK SUPERVISION ANNUAL REPORT 2020 TABLE OF CONTENTS TABLES 1 Ownership and Asset Base of Commercial Banks 4 2 Commercial Banks Market Share Analysis 5 3 ATM Networks 7 4 Microfinance Banks Balance Sheet Analysis 8 5 Microfinance Banks Market Share Analysis 9 6 Distribution of Foreign Exchange Bureaus 10 7 Growth of Deposit Account Holders Compared to Number of Staff 22 8 Mobile Transactions Data 23 9 Business Activities Facilitated by Representative Offices 24 10 Residential Mortgage Market Survey 2020 26 11(a) MSME Lending Compared to Total Banking Sector Loan Portfolio 28 11(b) MSMEs Deposits Held in Commercial Banks 28 11(c) MSMEs Deposits Held in Microfinance Banks 29 11(d) Income from MSMEs Lending as a proportion of Total Banking Sector Income 29 11(e) MSME Credit Facilities – Asset Quality 2019 – 20 (Ksh. Billion) 29 12 Employment in the Banking Sector 32 13 World Economic Outlook Projections 35 14 Real GDP Growth 36 15 Exchange Rate Developments 38 16 Fiscal Developments 40 17 Global Balance Sheet Analysis 41 18 Sectoral Distribution of Loans, Loan Accounts and Non-Performing Loans (NPLs) 42 19 Risk Classification of Loans and Advances 43 20 Asset Quality and Provisions 44 21 Capital Adequacy Ratios 44 22 Income and Expenditure Items as a Percentage of Total Income/Total Expenses 45 23 Banking Sector Performance Rating 46 24 Performance of Microfinance Banks 48 25a Agency Banking Data for Banks – Number of Transactions 49 25b Agency Banking Data for Banks – Value of Transactions 49 26 Number of Credit Reports Requested Since August 2015 51 27 Distribution of Outlets and Agents of MRPs 52 28 Total Remittance Inflows and Outflows of MRPs in 2019 and 2020 53 29 Branches of Kenyan Banks Subsidiaries in the Region 69 30 Regional Employee Count 70 31 Total Assets of Subsidiaries in Host Country 70 32 Deposit Distribution across Host Countries 71 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2020 III TABLE OF CONTENTS CHARTS 1 Structure of the Banking Sector 2 2 Bank Supervision Organogram 4 3 Ownership and Asset Base of Commercial Banks 5 4 Commercial Banks Market Share 6 5a Microfinance Banks Functional Areas of Innovation 31 5b Commercial Banks Functional Areas of Innovation 31 6 Developments in Inflation 37 7 Interest Rates 38 8 Developments in Current Accounts 39 9 Risk Classification of Loans and advances 43 10 Total Monthly Credit Reports requested by Banks 51 11 Percent of Gross Loans per Host Country 71 12 Regional Profitability 72 APPENDICES i Banking Sector Balance Sheet 73 ii Banking Sector Profit and Loss Account 74 iii Banking Sector Other Disclosures 75 iv Banking Sector Market Share 76 v Banking Sector Profitability 77 vi Banking Sector Gross Loans and Non-Performing Loans (NPLs) 78 vii Banking Sector Capital and Risk-Weighted Assets 79 viii Banking Sector Access to Financial Services 80 ix Banking Sector Protected Deposits 81 x Microfinance Banks Balance Sheet 82 xi Microfinance Banks Profit and Loss Account 83 xii Microfinance Banks Other Disclosures 84 xiii Residential Mortgages Market Development Survey, December 2020 85 xiv Banking Circulars Issued in 2020 86 xv A Summary of Signed MOUs 87 xvi Banks Branch Network by County 88 xvii Directory of Commercial Banks and Non-Banks 89 xviii Directory of the Microfinance Banks 98 xix Directory of Credit Reference Bureaus 100 xx Directory of Foreign Exchange Bureaus 101 xxi Directory of Money Remittance Providers 105 CENTRAL BANK OF KENYA IV BANK SUPERVISION ANNUAL REPORT 2020 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2020 V GOVERNOR’S MESSAGE The banking sector entered 2020 on a strong footing banking sector loans. The over 400,000 loan accounts poised to rebound after interest rate caps were repealed in restructured range from your neighborhood hair salon, 2019. At that point, the coronavirus (COVID-19) pandemic individuals, MSMEs, large flower farms, airlines, hotel that was to define 2020 did not feature in global discourse. chains to shopping malls and transport companies. At the Central Bank of Kenya (CBK), we had keenly followed the onset of the virus in China in early 2020 and As a testament to its resilience in a year dominated by its devastating spread to Europe and the United States. It COVID-19, the sector closed the year with a total capital was just a matter of time before it landed on our shores. adequacy ratio of 19.0 percent above the statutory minimum capital adequacy ratio of 14.5 percent. The We therefore moved quickly in tandem with the sector’s liquidity ratio of 54.5 percent was above the government, the banking sector and other players to statutory minimum of 20 percent. Total net assets grew institute measures to mitigate the adverse impact of by 12.4 percent from Ksh.4.8 trillion in December 2019 the pandemic when it landed in Kenya in March. The to Ksh.5.4 trillion in December 2020. Customer deposits measures were intended to facilitate Kenyans to use digital increased by 13.6 percent from Ksh.3.5 trillion in December financial services to mitigate the COVID-19 infection risks, 2019 to Ksh.4.0 trillion in December 2020. ensure continued operations of the banking sector while safeguarding the health and safety of bank staff, customers On the economic front, the onset of the pandemic was and the public. Further, the measures were intended to delayed in Sub-Saharan Africa, but by year end, the region provide relief to borrowers adversely impacted by the was battling an unprecedented health and economic effects of the pandemic. crisis. This was underpinned by stringent containment measures instituted to control the pandemic. On the Building on business continuity and pandemic response domestic front, the Kenyan economy contracted in the first guidance from CBK, the banking sector during the three quarters of 2020 following the devastating impact of pandemic ‘kept the lights on.’ While ensuring the health COVID-19. The contraction was mainly driven by significant and safety of customers and staff, over 90 percent of the declines in the Services sector that bore the brunt of the approximately 1,500 bank branches across the country COVID-19 containment measures. remained open. The over 30,000 bank staff have been in the frontline serving Kenyans even in areas locked down As we build back from COVID-19, CBK’s vision remains one to contain the pandemic. of a banking sector that is responsible, disciplined and aligned to customers’ needs. Accordingly, banks continue To minimize the health risk and support Ministry of Health to operationalize the four pillars of the vision: customer ‘stay at home’ protocols, banks have enhanced the use of centricity, risk-based credit pricing, transparency and digital channels.