Advertisement

Decline in savings forces Kenyan banks to ask shareholders for more cash

Thursday May 11 2017
saving

Kenyans are shift money from bank accounts to alternative investments that promises decent returns.

Across-section of Kenyan banks are banking on shareholders to shore up their core capital as customers shift money from bank accounts to alternative investments that promises decent returns.

The government recently launched a mobile telephony-based Treasury bond (M-Akiba) to attract small and medium sized businesses.

It is also argued that the thriving gambling industry valued at Ksh200 billion ($2 billion) is competing with banks for depositors.

This comes in the wake of interest rate caps that have restricted lending rates at four percentage points above the prevailing Central Bank Rate (CBR) and the minimum interest rate on deposits at not less than 70 per cent of the policy rate.

“What we have now is a scenario where someone is looking at: What other options do I have rather than keep my money in the bank? Most people want to keep their money in Treasury bills and bonds whose returns are comparatively higher than the existing deposit rates,” said Eric Munywoki, head of research and business development at Sterling Capital Ltd.

“The good thing about banks giving out bonus shares is that the cash is not leaving the bank as opposed to when they are paying dividends. This shores up the core capital and strengthens the capital adequacy ratios of the bank,” added Mr Munywoki.

Advertisement

Among the banks that have announced plans to raise additional capital through bonus issues are Co-operative Bank and Jamii Bora Bank.

Co-op Bank, with operations in South Sudan, plans to create an additional 2.5 billion ordinary shares of Ksh1 ($0.01) each to grow its authorised share capital to 7.5 billion shares of Ksh1 ($0.01) each.

The increase in the authorised share capital will allow the bank to issue a total of 977 million new shares to the existing shareholders in the ratio of one share for every five held, thereby recapitalising Ksh977 million ($9.77 million).

Jamii Bora Bank’s shareholders also approved a proposal for the bank to increase its authorised share capital to Ksh5.02 billion ($50.2 million) from Ksh3.04 billion ($30.4 million) by creating an additional 30 million ordinary shares valued at Ksh66 ($0.66) a piece over a period of five years.

Alternative investments

Kenya affected a controlled interest rate regime from September 14, 2016, after persistent calls for banks to lower lending rates failed to yield fruit.

Interest rates on current accounts for bulk depositors (corporates) declined to less than one per cent from 1.5 per cent while small depositors earned nothing after the new regime was adopted.

Bank customers with savings accounts earn 7 per cent but this return compares unfavourably with the 91-day Treasury bill rate that offers investors a return of 8.77 per cent in three months  and the government’s retail investor-focused M-Akiba bond that offers 10 per cent interest per annum.

On the other hand, Britam asset managers reduced its money market fund investment amount to Ksh1,000 ($10) from Ksh10,000 ($100) to encourage Kenyans to save more.

The Britam Money Market Fund will allow investors to invest from as low as Ksh1,000 ($10) with subsequent top ups of Ksh1,000 ($10).

“Many Kenyans have been locked out from saving and investing their money because of the big initial capital amounts needed in the money market. This fund has been designed to address the needs of the small saver,” said Kenneth Kaniu, chief executive of Britam Asset Management Company Ltd.

According to the Kenya Bankers Association, returns on short term deposits of up to three months have dried up in the market.

“Returns on short-term deposits have dried up. Banks demand short term deposits of up to three months to be put in current accounts which do not earn interest,” said Habil Olaka, CEO of KBA.

“Liquidity in the banking industry has not been sufficient since January 2016. We have chosen to invest in risk free government securities because we don’t have money to provide for the risks” said James Mwangi, chief executive, of Equity Bank Group.

Advertisement