AMG Consulting on outlook for Kenya’s banking sector

The Kenyan banking sector is facing a mixed bag of positives and negatives, with T1 banks enjoying impressive growth while T2 and T3 banks grapple with liquidity challenges. With T1 banks controlling about 74.5% of the market, they have been able to weather the storm of rising interest rates better than their counterparts. Over the last two quarters, interest rates have increased, leading to higher costs of borrowing for customers and subsequently impairing some loans. This disparity in performance between T1 and other banks underscores the importance of balance sheet size in navigating market fluctuations. The Central Bank of Kenya has played a crucial role in supporting the banking industry by providing liquidity support, especially to T2 and T3 banks. This support has helped these players manage liquidity better, although the effects of these initiatives are yet to be fully realized. As commercial banks prepare to announce their Q3 results, it is expected that T1 banks will report impressive growth, while T2 and T3 banks may face challenges in maintaining profitability. The liquidity crunch in the market has been exacerbated by government policies aimed at centralizing deposits at the central bank. Additionally, the introduction of attractive treasury bills has further reduced available liquidity for commercial banks, especially those in the lower tiers. While larger banks are better equipped to handle these liquidity challenges, smaller players may struggle to stay afloat amidst the changing market dynamics. In a strategic move to diversify investment opportunities, the Capital Markets Authority has opened a window for Kenyan companies to issue regional bonds to investors across East Africa. This initiative, long overdue according to financial analyst Judge Munga Amolo, will not only attract capital from a wider pool of investors but also provide investors with a range of investment opportunities across the region. By allowing companies to access funds from investors in different East African countries, this move is expected to create a more vibrant bond market and stimulate economic growth in the region. Despite the minimum size price set for these regional bonds, which stands at 122 million shillings, analysts believe that this development will foster increased investment and cross-border capital flows. With the potential for investments to grow by 20-30% in the coming years, the regional bond program is viewed as a significant step towards enhancing the liquidity and efficiency of the East African capital markets.