Interview : Jeremy Awori
What are the challenges of shifting to the ninth International Financial Reporting Standard (IFRS 9)?
JEREMY AWORI: The shift to IFRS 9 will have a very broad impact on regulations. This is a global accounting standard, and compliance is not optional. Building models on expected credit losses has been relevant, and international banks have taken the lead on that front. IFRS 9 is not only an accounting change, but also a set of regulations specifying the amount of capital banks should hold. The central bank has taken a wise approach, giving financial institutions five years to comply and manage the transition. Reporting comes with a level of complexity, as institutions need to generate various different sets of books, for IFRS 9, the central bank, tax reporting and others. Overall, if the scenario of IFRS 9 implementation continues with interest rate caps unchanged, there is a high likelihood that credit would be constrained.
How should the structure of the sector change?
AWORI: The banking sector needs to have a smaller number of banks. In 2018 there are nearly 40, each serving a niche market. However, mergers and acquisitions (M&A) need to take place with caution, since two weak banks do not make a strong and highly capitalised one. It would certainly make sense for Tier-1 or Tier-2 banks to acquire their Tier-4 or Tier-5 counterparts. The real questions for the acquiring parties are the returns versus the risks. Additionally, the question of control of the struggling banks will continue to slow M&A. However, we can expect some M&A, and it would certainly be desirable to better serve customers.
What are the key determinants of credit levels?
AWORI: Return on equity and on assets is fundamental; the level of public debt held by banks generates a slight challenge for fund allocation. The real variable to watch is the level of the government’s debt profile as it moves forward, and how this affects infrastructure and social projects. If Treasury bill options were not available, banks would need to direct more funding to the private sector. Also, the levels of liquidity and non-performing loans in the market will be fundamental, affecting the ability to lend, especially if interest rates remain controlled. The interest rate is always a significant determinant of credit growth. In 2018 the Monetary Policy Committee adjusted the central bank rate downwards from 10% to 9.5%. While not a result of this, private sector credit growth moved from 2.8% in April 2018 to 4.3% two months later and has remained unchanged thereafter. Furthermore, increased taxation arising from the fiscal policy changes is likely to put pressure on disposable income available to households to service their debt. Overall economic performance will be essential in supporting credit growth, and sector performance and borrower creditworthiness will determine the distribution of the available credit.
How has technology supported financial inclusion?
AWORI: As far as financial inclusion goes, innovation has played a key role in addressing trust, fear, pricing and literacy, which are all potent issues in the developing world. The advent and growth of mobile-based financial solutions has opened an opportunity for banks to expand beyond brick-and-mortar institutions, providing every Kenyan with a variety of financial services through the convenience of a mobile phone.
Indeed, mobile network operators have helped lay the groundwork for financial services to reach unserved and underserved populations. As a result, over 80% of Kenyans can access formal payment and money transfer services. As technology adoption and innovation evolves, the interactions between banks and customers change, and the share of transactions going through alternative channels grows. Virtual banking platforms are transforming the sector, with customers now able to get a loan almost instantly, when it previously took weeks. Technology allows us to offer these products without compromising security and control standards.