Bad loans push banks’ profitability lower

Wednesday October 06 2021

Many banks have adopted alternative revenue generation channels such as digital products — such as the WhatsApp Banking platform that was unveiled by Absa executives led by chief executive Jeremy Awori (centre) — to gain more customers. PHOTO | FILE

By Albert Mwazighe

Banks in the region are registering a gradual decline in profits as the number of non-performing loans increases, blamed on the economic downturn of the Covid-19 pandemic.

In the East Africa Banking Industry trends 2021 Report by financial services firm Deloitte, the high number of non-performing loans is an issue of concern which will continue to negatively affect bank earnings, curtailing financial institutions from lending to small and medium-sized firms who are perceived as high risk, but who represent the bulk of borrowers.

“The decline in profitability is partly attributable to rising impaired credit quality that is matched by higher provisions, and the marginal increment in the cost-to-income ratio.

‘‘All this is driven by the adverse effects of Covid-19 on the economy,” notes Deloitte.

“Rigorous credit loss assessments will assist banks in better risk assessment and pricing of their credit facilities. In so doing, banks will be better prepared to mitigate their expected losses.”

Bank of Uganda data shows banking sector profitability fell by Ush39.1 billion ($11 million) to Ush844.3 billion ($238.7 million) from Ush883.4 billion ($249.8 million) in 2019 in 2020.


This was brought about by an increase in the number of non-performing loans, up from Ush685.7 billion ($193.9 million) in December 2019 to Ush894 billion ($252.8 million) in June 2020.

Alternative streams

Banks have since adopted alternative revenue generation channels such as digital products to enable them access more customers.

This has seen customer deposits in Kenyan banking industry for instance rise by 8.9 percent from $34.3 billion in 2019 to $37.3 billion in 2020, with the first quarter of 2021 registering a further increase to $38.8 billion.

The Tanzania banking industry has a relatively better performance evidenced by a gradual increase in profitability, and a welcome decline in non-performing loans since 2018.

According to the Bank of Tanzania, as at the end of December 2020, profit after tax had increased to Tsh414.74 billion ($179.5 million) from Tsh351.11 billion ($152 million) in 2019.

Customer deposits grew by five percent in 2020 to Tsh23.44 trillion ($10.15 billion), while non-performing loans in the country declined from 8.04 percent in 2019 to 7.73 percent in 2020.

Asset quality improved as evidenced by the decline in ratio of non-performing loans to gross loans from 10.5 percent in 2018 to 9.6 percent in 2019.

“The improvement is attributed to various measures taken by Bank of Tanzania, including requiring lenders to enhance credit-underwriting standards and loan recovery efforts,” notes Deloitte.