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Credit Survey Report for the Quarter Ended March 2020

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CENTRAL BANK OF KENYA Commercial Banks’ Credit Officer Survey January - March 2020 1 CENTRAL BANK OF KENYA COMMERCIAL BANKS’ CREDIT OFFICER SURVEY JANUARY - MARCH 2020 1.0 COMMERCIAL BANKS’ CREDIT OFFICER SURVEY BACKGROUND The survey sought to establish the lending behavior in the banking sector in respect to all the eleven Credit risk is the single largest factor affecting the economic sectors. Questions were posed on demand soundness of financial institutions and the financial for credit, credit standards for approving loans, level system as a whole. This is because lending is the of interest rates, non-performing loans, the effect principal business for banks. The ratio of gross loans of repeal of capping of interest rates2 on lending to total assets decreased marginally from 57.42 to Small and Medium sized Enterprises (SMEs), percent in the quarter ended December 31, 2019 to credit recovery efforts, implementation of IFRS 9 on 56.94 percent in the quarter ended March 31, 2020. Financial Instruments and implementation of IFRS 16 on Leases. The survey questions are generally The Central Bank of Kenya (CBK) undertakes a phrased in terms of changes over the past three quarterly Credit Officer Survey to identify the months or expected changes over the next three potential drivers of credit risk. The survey was revised months. to include new aspects such as implementation of International Financial Reporting Standard (IFRS) 9 The survey also included questions with regard and 16, liquidity risk and emerging developments. to liquidity in the banks. The banks were required The survey requires senior credit officers of banks to state their appetite for deployment of liquidity to indicate their banks perception or actual position towards extension of credit, interbank lending and in the immediate past quarter and the subsequent other forms of investment. quarter in terms of demand for credit, credit standards, interest rates, asset quality, credit Following the declaration by the World Health recovery efforts, deployment of liquidity and impact Organization of the coronavirus (COVID-19) outbreak of emerging developments on commercial banks’ as a pandemic, CBK through the credit officer survey financial position and performance. assessed the impact of the pandemic on the banking sector. 1.2 SURVEY METHODOLOGY Senior Credit Officers1 complete most of the survey The survey included questions relating to impact and collate inputs from senior officers responsible of the pandemic on the banks, measures taken by for the other aspects. For the quarter ended March banks to curb the potential impact of the pandemic 31, 2020, 38 operating commercial banks and 1 and their experience in implementing the emergency mortgage finance company participated in the measures introduced by CBK to mitigate the impact Commercial Banks Credit Officer Survey. of the pandemic. 1These are officers involved in most of the credit decisions hence are able to provide reasonably accurate and complete ²The capping of interest rates law came into effect on responses from their banks perspective. They also collate input on non-credit aspects from their counterparts. September 14, 2016 and was repealed on November 7, 2019. CENTRAL BANK OF KENYA 2 Commercial Banks’ Credit Officer Survey January - March 2020 1.3 KENYAN BANKING SECTOR • Quarterly profit before tax increased by Ksh.3.73 PERFORMANCE billion to Ksh.38.34 billion in March 2020 from Ksh.34.61 billion in December 2019. Return The Kenyan Banking Sector recorded growth in on Assets decreased to 2.33 percent in March the quarter ended March 31, 2020, compared to 2020 from 2.54 percent in December 2019. The the quarter ended December 31, 2019. Some of the total assets increased by 3.49 percent whereas sector’s performance indicators are as follows: - quarterly profit before tax decreased by 60.53 percent during the quarter hence the decrease • The aggregate balance sheet increased by 3.49 in Return on Assets. percent from Ksh.4,832.35 billion in December 2019 to Ksh.5,001.16 billion in March 2020. The • Return on Equity decreased to 20.38 percent increase was attributed to increased investment in March 2020 from 21.23 percent in December in government securities and foreign currency 2019. This is as a result of a drop in quarterly loans during the period. profit before tax in March 2020. • Gross loans increased by 2.62 percent from • During the quarter ended March 2020, liquidity Ksh.2,774.65 billion in December 2019 to in the banking sector marginally increased from Ksh.2,847.44 billion in March 2020. The growth 49.7 percent in December 2019 to 51.45 percent. in gross loans was mainly due to increased This was well above the minimum statutory advances in the Manufacturing, Trade, Personal/ ratio of 20 percent. Household and Tourism, Restaurant and Hotels sectors. 1.4 SUMMARY OF CREDIT OFFICER • Total deposits increased by 3.8 percent from SURVEY FINDINGS Ksh.3,554.42 billion in December 2019 to • Demand for credit: In the first quarter of 2020, Ksh.3,688.08 billion in March 2020. There was the perceived demand for credit remained an increase in both foreign and local currency unchanged in nine economic sectors except deposits. Personal/household and Trade sectors whose • The asset quality, measured by ratio of demand for credit was perceived to have gross non-performing loans to gross loans increased. The increased demand in the two deteriorated from 12.01 percent in December sectors is attributed to increased demand for 2019 to 12.54 percent in March 2020. This was consumer goods and services. attributed to a slowdown in business activities. • Credit Standards3: In the first quarter of 2020, • The total capital adequacy ratio decreased credit standards remained unchanged in eight from 18.79 percent in December 2019 to 18.50 economic sectors and tightened in two sectors percent in March 2020. This is as a result of a (Real Estate and Tourism, Restaurants and higher increase in total risk weighted assets Hotels). as compared to increase in total capital. The capital adequacy ratio reported in March 2020 ³Credit standards are guidelines used by commercial banks in was above the minimum statutory limits of 14.5 determining whether to extend a loan to an applicant. percent. CENTRAL BANK OF KENYA Commercial Banks’ Credit Officer Survey January - March 2020 3 • The main sectors with unchanged credit • Expected Non-Performing Loans levels standards are Energy and Water, Mining and during the second quarter: 61 percent of Quarrying, Financial Services and Agriculture. the respondents indicated that NPLs are likely Tightened credit standards in the Real Estate to increase in the second quarter of 2020 as a and Tourism, Restaurants and Hotels sectors result of the global COVID-19 pandemic. The was attributed to a slowdown in economic respondents indicated that all the eleven activity coupled by the effects of COVID – 19 economic sectors will be affected negatively by pandemic. the pandemic. • Repeal of interest rate capping law: CBK has • Credit Recovery Efforts: For the quarter continued to assess the impact of the repeal of ended June 30, 2020, banks expect to intensify interest rate capping law on demand for credit, their credit recovery efforts in nine of the eleven lending to SMEs, and actual credit granted. economic sectors. The intensified recovery efforts are aimed at improving the overall 80 percent of the respondents indicated that quality of the asset portfolio. after the repeal of interest rate capping law, the demand for credit remained unchanged, 17 • International Financial Reporting Standard percent noted that demand for credit increased (IFRS) 9 on Financial Instruments: while 3 percent noted that demand for credit Implementation of IFRS 9 had an adverse decreased. impact on commercial banks’ capital adequacy due to increased provisioning. This led the • Lending to Small and Medium-sized commercial banks to explore injection of more Enterprises (SMEs): In the quarter ended capital. March 2020, 68 percent of the respondents • International Financial Reporting Standard indicated that the repeal of interest rate capping (IFRS) 16 on Leases: Most banks indicated that law did not negatively affect their lending to implementation of IFRS 16 increased their risk SMEs. weighted assets, which has in turn negatively • Non-Performing Loans: During the quarter affected their capital adequacy ratios. under review, the respondents indicated that • Liquidity risk: During the quarter ended March the levels of NPLs remained unchanged in 2020, liquidity of the banking industry remained four economic sectors and increased in seven fairly stable. sectors. The main sectors with increased NPLs include Tourism, Restaurant and Hotels, • Banks indicated that they intended to deploy Transport and Communication, Trade, Real excess liquidity towards credit, mostly by Estate, Personal/Household, Building and lending to the private sector, CBK liquidity Construction and Manufacturing sectors. management through repos and interbank lending. In addition, banks intend to utilize The increase in NPLs was mainly due to a excess liquidity to invest in treasury bills and challenging business environment. bonds. CENTRAL BANK OF KENYA 4 Commercial Banks’ Credit Officer Survey January - March 2020 2.0 SURVEY FINDINGS 2.1 Demand for Credit • In the first quarter of 2020, the perceived • Perceived demand for credit on the other hand demand for credit remained unchanged in increased in the Personal/Household and nine economic sectors and increased
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