CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2019 1 TABLE OF CONTENTS VISION STATEMENT VII THE BANK’S MISSION VII MISSION OF BANK SUPERVISION DEPARTMENT VII THE BANK’S CORE VALUES VII GOVERNOR’S MESSAGE IX FOREWORD BY DIRECTOR, BANK SUPERVISION X EXECUTIVE SUMMARY XII 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 9 1.8 Distribution of Foreign Exchange Bureaus 11 CHAPTER TWO DEVELOPMENTS IN THE BANKING SECTOR 2.1 Introduction 13 2.2 Banking Sector Charter 13 2.3 Demonetization 13 2.4 Legal and Regulatory Framework 13 2.5 Consolidations, Mergers and Acquisitions, New Entrants 13 2.6 Medium, Small and Micro-Enterprises (MSME) Support 14 2.7 Developments in Information and Communication Technology 14 2.8 Mobile Phone Financial Services 22 2.9 New Products 23 2.10 Operations of Representative Offices of Authorized Foreign Financial Institutions 23 2.11 Surveys 2019 24 2.12 Innovative MSME Products by Banks 27 2.13 Employment Trend in the Banking Sector 27 2.14 Future Outlook 28 CENTRAL BANK OF KENYA 2 BANK SUPERVISION ANNUAL REPORT 2019 TABLE OF CONTENTS CHAPTER THREE MACROECONOMIC CONDITIONS AND BANKING SECTOR PERFORMANCE 3.1 Global Economic Conditions 30 3.2 Regional Economy 31 3.3 Domestic Economy 31 3.4 Inflation 33 3.5 Exchange Rates 33 3.6 Interest Rates 34 3.7 Balance of Payments 35 3.8 Fiscal Developments 35 3.9 Performance of the Banking Sector 36 3.10 Commercial Banks Balance Sheet Analysis 36 3.11 Sectoral Distribution of Gross Loans, Loan Accounts and Gross Non Performing loans 37 3.12 Asset Quality 38 3.13 Capital Adequacy 40 3.14 Liquidity 40 3.15 Profit and Loss 40 3.16 Performance Rating 41 3.17 Compliance with Supervisory and Regulatory Requirements 42 3.18 Performance of Microfinance Banks 43 3.19 Agency Banking 44 3.20 Credit Reference Bureaus 46 3.21 Money Remittance Providers 48 CHAPTER FOUR DEVELOPMENTS IN SUPERVISORY FRAMEWORK 4.1 Introduction 51 4.2 Amendments to the Banking Act, Central Bank of Kenya Act and Microfinance Act 51 4.3 Host Country Assessments 52 4.4 Developments in Anti-Money Laundering and Combating Financing of Terrorism 53 CHAPTER FIVE REGIONAL AND INTERNATIONAL DEVELOPMENTS AND INITIATIVES 5.1 Introduction 56 5.2 Regional and International Initiatives 56 5.3 Kenyan Banks Regional Footprint 65 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2019 3 TABLE OF CONTENTS TABLES 1 Ownership and Asset Base of Commercial Banks 4 2 Commercial Banks Market Share Analysis 6 3 ATM Networks 7 4 Microfinance Banks Balance Sheet Analysis 8 5 Performance of Microfinance Banks 9 6 Microfinance Banks Market Share Analysis 10 7 Distribution of Foreign Exchange Bureaus 11 8 Growth of Deposits Account Holders Compared to Number of Staff 22 9 Mobile Transactions Data 23 10 Business Activities Facilitated by Representative Offices 24 11 Residential Mortgages Market Survey – December 2019 26 12 Employment in the Banking Sector 28 13 World Economic Outlook Projections 30 14 Real GDP Growth Rates 32 15 Exchange Rate Developments 34 16 Fiscal Developments 36 17 Global Balance Sheet Analysis 37 18 Sectoral Distribution of Loans, Loan Accounts and Non-Performing Loans (NPLs) 38 19 Asset Quality and Provisions 38 20 Risk Classification of Loans and Advances 39 21 Capital Adequacy Ratios 40 22 Income and Expenditure Items as a Percentage of Total Income/ Total Expenses 41 23 Banking Sector Performance Rating 42 24 Performance of Microfinance Banks 44 25(a) Agency Banking Data for Banks- Number of Transactions 45 25(b) Agency Banking Data for Banks- Value of Transactions 46 26 Number of Credit Reports Requested Since August 2010 47 27 Distribution of Outlets and Agents of MRPs 48 28 Knowledge Exchanges Undertaken in 2019 65 29 Branches of Kenyan Banks Subsidiaries in the Region 66 30 Asset of Subsidiaries 67 CENTRAL BANK OF KENYA 4 BANK SUPERVISION ANNUAL REPORT 2019 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 5 Functional Areas of Innovation 16 6 Developments in Inflation 33 7 Interest Rates 34 8 Developments in Current Accounts 35 9 Risk Classification of Loans and Advances 39 10 Total Monthly Credit Reports requested by Banks 47 APPENDICES i Banking Sector Balance Sheet 68 ii Banking Sector Profit and Loss Account 69 iii Banking Sector Other Disclosures 70 iv Banking Sector Market Share 71 v Banking Sector Profitability 72 vi Banking Sector Gross Loans and Non-Performing Loans 73 vii Banking Sector Capital and Risk Weighted Assets 74 viii Banking Sector Access to Financial Services 75 ix Banking Sector Protected Deposits 76 x Microfinance Banks Balance Sheet 77 xi Microfinance Banks Profit and Loss Account 78 xii Microfinance Banks Other Disclosures 79 xiii Residential Mortgages Market Development Survey, December 2018 80 xiv Banking Circulars Issued in 2018 81 xv A Summary of Signed MOUs 82 xvi Banks Branch Network by County 83 xvii Directory of Commercial Banks and Non-Banks 84 xviii Directory of Microfinance Banks 97 xix Directory of Credit Reference Bureaus 100 xx Directory of Foreign Exchange Bureaus 101 xxi Directory of Money Remittance Providers 108 CENTRAL BANK OF KENYA CENTRAL BANK OF KENYA 5 BANK SUPERVISION ANNUAL REPORT 2018 BANK SUPERVISION ANNUAL REPORT 2019 5 CENTRAL BANK OF KENYA CENTRAL BANK OF KENYA 6 BANK SUPERVISION ANNUAL REPORT 2019 BANK SUPERVISION ANNUAL REPORT 2018 6 GOVERNOR’S MESSAGE The year 2019 marked a decade since the peak of the On the regulatory front, the following key developments global financial crisis in 2009. Since then, the global were achieved during the year: - banking system has been significantly strengthened through global regulatory reform measures. These Kenya Banking Sector Charter measures have resulted in stronger capital and liquidity buffers. Global regulatory reforms continued in 2019 CBK’s vision is for a banking sector that “works for and focusing increasingly on data governance. This was with Kenyans’’. To operationalize this vision, the Kenya informed by the continued influence of technology Banking Sector Charter (the Charter) was issued in particularly data management, artificial intelligence February 2019. The Charter is anchored on four pillars and the growing adoption of cloud technology. Banks of customer centricity, transparency, risk based credit scaled up partnerships with fintechs and bigtechs to pricing and doing the right thing. Banks developed board leverage their agility in the new age of technology. On the approved implementation plans to integrate the Charter risk frontier, technology presented new opportunities in their strategy and operations. for banks to leverage on data to identify and mitigate emerging risks, particularly cyber-security. Mergers and Acquisitions Economic growth in Sub-Saharan Africa took a dual i. The merger and acquisition between Commercial path approach. Some countries exhibited robust Bank of Africa Limited (CBA) and NIC Group PLC growth driven by higher levels of public investment and resulting in NCBA Group PLC was completed effective diversity in their economies. On the other hand, resource September 30, 2019. This transaction is expected to dependent economies registered anaemic growth rates strengthen the institutions through leveraging on on the back of weaker commodity prices. their combined market share of 9.9 percent and customer base of over 40 million in four East African Kenya’s economy expanded by 5.4 percent compared countries of Kenya, Tanzania, Rwanda and Uganda. to 6.3 percent in 2018. This was a strong performance ii. The acquisition of 100 percent shareholding of in light of the delayed onset and below average rainfall National Bank of Kenya Limited by KCB Group experienced in the first half of 2019 that affected the PLC, which was completed in September 2019. agricultural sector. The services sector supported the The acquisition is expected to strengthen both growth in 2019. institutions by leveraging on their respective well- established domestic and regional corporate, public Kenya’s banking sector remained stable and resilient sector and retail franchises. in 2019, with a total capital adequacy ratio of 18.79 in December 2019 above the minimum capital adequacy The recent reforms by CBK will position the banking ratio of 14.5 percent. Similarly, the sector’s liquidity sector to play a more critical role in financing Kenya’s stood above the minimum statutory level of 20 percent development aspirations. More importantly, the reforms at an average liquidity ratio of 49.74 percent in the will enhance the resilience of the sector in the midst of same period. Total net assets grew by 9.1 percent from an ever-changing domestic, regional and international Ksh.4,408 trillion in December 2018 to Ksh.4,809 trillion arena. As institutions respond to these changes, their in December 2019. Customer deposits increased by 8.22 customers must remain at the centre of their strategies percent from Ksh.3.259 trillion in December 2018 to and operations. Ksh.3.53 trillion in December 2019. Dr. Patrick Njoroge Governor, Central Bank of Kenya CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2019 7 FOREWORD BY DIRECTOR, BANK SUPERVISION The Kenyan banking sector remained stable and resilient Licence Approvals in 2019. The sector’s gross loans and advances increased by 8.80 percent from Ksh.2.488 trillion in December 2018 • Muungano Microfinance Bank was granted a licence to Ksh.2.707 trillion in December 2019.