Trends and policies in the banking & finance industry in Kenya - 2017
Akash Devani, Partner, Anjarwalla & Khanna, and Leah Muchiri, Principal Associate, Anjarwalla & Khanna, a founding legal firm of the Africa Legal Network, write exclusively for Banker Africa
Trade, investment and business between Africa and the rest of the world has, in the past decade, seen an upward trajectory like never before. Due to such growth and investment, the banking and finance industry in Kenya has undergone a number of changes in the recent past which have efficiently improved the finance market and elevated the industry to global standards of banking. Some of these changes have been brought about by the amendments to the Banking Act and the introduction of new Acts such as the Companies Act and the revolutionary Insolvency Act, both of which were introduced in 2015.
There are currently 44 commercial banks, 12 deposit-taking microfinance banks, 30 non-regulated credit-only microfinance institutions, five mobile money operators and 199 registered savings and credit cooperatives (Saccos) gearing to build a new crop of financial services in Kenya. The Central Bank of Kenya (CBK) has encouraged and nurtured innovations in the financial sector which has led to significant growth in the sector.
CBK has recently lifted its 16-month moratorium on new banking licences after it announced the licencing of the first institution, DIB Bank Kenya (DIB) on 28th April 2017. It is further set to licence another local institution, Mayfair Bank Limited (Mayfair), after granting it the approve-in-principle.
The lifting of the moratorium by CBK signals a return of stability in the Kenyan banking sector, which has in the past two years experienced turbulence, resulting in the collapse of three banking institutions in the country. This comes as good news to foreign institutions that have been making overtures to Kenya and to new entrants seeking a stake in the local banking sector.
The availability of high speed broadband and mobile connectivity in the country has created new developments in product packaging and service delivery in banking. Some of these significant trends include:
Mobile banking: Mobile telecommunication applications and services such as M-Pesa (Safaricom), Airtel Money (Bharti Airtel) and Orange Money (Orange) operate mobile payment systems which enable their customers to send, borrow, pay bills and save and earn interest on monies saved on their mobile phone accounts;
E-banking: where customers are able to virtually carry out their banking business without having to go to physically visit the banks;
Electronic cheques: some banks now permit customers to issue a cheque electronically thereby eliminating the need for customers to carry cheque books;
Package banking: banks now offer more services to their customers in one package without increasing their charges for these services;
Insurance covers: offered by banks to the customers that hold certain amounts of money in their accounts. These covers protect the customers’ funds;
Agency banking: is also a modern financial innovation by commercial banks being used by banks in Kenya today. A bank agent is a retail or trading outlet contracted by a bank or financial institution to process client's transactions. Some of the transactions that these agents carry out include accepting client’s deposits and withdrawals, inquiring account balances, carrying out transfer of funds and paying bills;
Shari'ah banking: there has also been considerable growth in the Islamic banking market in Kenya. There are two fully-fledged Islamic banks and about six banks offering a variety of Islamic finance products and insurance in the market; and
Stock brokerage: banks and financial institutions are also actively involved in stock brokerage services. These banks trade in securities such as shares in the stock market on behalf of customers.
These trends have made it increasingly trouble-free to conduct business in Kenya and have provided a platform with opportunities for financial growth for every Kenyan and potential investors.
The CBK is tasked with the responsibility of developing the laws, regulations and guidelines that govern the players in the banking sector. The banking and finance industry in Kenya is also governed by the Banking Act (Cap 488) and the CBK Act (Cap 491). Recent changes to various legislations which have contributed to the growth of the banking and finance industry in Kenya include:
- 1. The Companies Act, 2015
The new Companies Act has replaced outdated business regulations which made it difficult to do business in Kenya and have instead made it possible for start-ups to have a smooth entry into the business market whereas it was only easily accessible to large corporations.
- 2. The Banking (Amendment) Act 2016
On 24th August 2016, the Banking (Amendment) Act 2016 was passed. This Act amended the Banking Act (Cap 488), Laws of Kenya, by placing a restriction on the interest rate which banks offer loans and deposits. The amendment puts a cap on lending rates at four per cent above the Central Bank Rate (CBR) and a floor on the deposit rates at 70 per cent of the CBR. Capping interest rates in Kenya has had the effect of solving the high interest rate spreads in the banking sector and has made credit facilities easily accessible to borrowers. However, it has also had the effect of locking out Small Medium Enterprises (SMEs) and other “high risk” borrowers from accessing credit.
Banks are now more inclined to lend to the Government and other “low risk” borrowers. Consequently, the profitability of banks has reduced significantly. In October 2016, the profit before tax declined by 14.7 per cent from 10.9 billion in September 2016 to 9.3 billion in October 2016.
The International Monetary Fund (IMF) has called Kenya to do away with the law, stating that it is not good for Kenya’s economic growth. The IMF has emphasised that interest caps have a complicated monetary policy and adversely affect credit access for small and microenterprises.
- 3. Islamic banking regulations
In an attempt to regulate Islamic banking operations and products, Kenya made slight changes to its Banking Act. Initially, the Banking Act only made reference to ‘interest’. The Banking Act was subsequently amended in 2008 by adding the phrase “or a return in the case of an institution carrying out business in accordance with Islamic law” when referring to interest chargeable on a savings account.
- 4. The Insolvency Act, 2015
The new Insolvency Act gives priority to revival of insolvent companies as compared to the previous insolvency provisions under the Companies Act which aimed at liquidating the companies. The Act provides mechanisms in which companies can reschedule their debts to extend the repayment period instead of immediately commencing liquidation proceedings in court.
- 5. The National Payment System (NPS)
In 2014, the NPS regulations were passed into law, providing the first formal legal framework for mobile money and paving the way for increased interoperability across payment providers.
The economy in Kenya is projected to record much slower growth on the back of the August 2017 general election jitters and owing to interest cap legislation. On 31 January, the Central Bank downgraded Kenya’s economic growth forecast to 5.7 per cent in 2017 from 5.9 per cent last year, citing uncertainties in the global economy amid a ravaging drought.
The increase in the use of mobile banking across most banks and financial institutions and the increase in the use of technology to assist develop the economy may prove to be a stepping stone for banks and financial institutions despite the uncertainties owing to the general elections. Further, the various investment projects such as the $3.2 billion standard gauge railway as well as other projects should continue to boost the economy’s global competitiveness.