The banking season: Kenyan banks' credit growth or rising risk?

Kenyan banks are currently facing a crucial juncture as they navigate the evolving financial landscape. The key question on everyone's mind is whether the surge in loan book growth is being driven by genuine market demand or if riskier lending practices are fueling this growth. To shed light on this important issue, Robert Ochieng, CEO & Co-Founder of Abojani Investment, recently joined CNBC Africa for an insightful discussion. Robert Ochieng pointed out that the recent performance of Kenyan banks needs to be scrutinized in light of macroeconomic factors such as the exchange rate fluctuations between the USD and the Kenyan shilling. While some banks appear to show solid loan book growth on the surface, the picture changes when considering these currency dynamics. The impact of USD-denominated loans and regional subsidiaries can distort the true growth figures when converted back to Kenyan shillings. As a result, assessing the performance of banks in 2024 becomes particularly challenging due to these foreign currency elements on their balance sheets. Furthermore, Ochieng highlighted the varying economic performances across sectors in Kenya. While sectors like tourism have seen positive growth, others like manufacturing are facing challenges. Additionally, household-level financial pressures, including new deductions like health insurance, housing levies, and NSSF increments, are impacting the working class and, consequently, the informal sector. With each formally employed Kenyan supporting an average of five dependents, even small cuts in salaries have significant ripple effects throughout the economy. Turning to the topic of political and regulatory risks, Ochieng acknowledged that Kenya's banking history has been marked by such uncertainties. In particular, the legacy of interest rate caps and the ongoing debate surrounding high lending rates pose potential risks for banks. Finding a balance between deposit rates and lending rates is crucial to address public sentiment and maintain financial stability. Moreover, the transition to risk-based lending practices represents a learning curve for the sector, requiring patience and continuous refinement of lending models to mitigate associated risks. Lastly, the conversation touched upon banks reporting strong forex trading income, raising questions about the sustainability of this trend and the underlying client activity versus opportunistic trading. Ochieng emphasized the importance of banks embracing risk-based lending practices and adapting to market dynamics to ensure long-term success. In conclusion, as Kenyan banks continue to navigate the banking season, striking a balance between credit growth and risk management will be essential for sustainable growth and stability in the sector.