Going into the COVID-19 pandemic, the Kenyan banking sector was already experiencing challenges from deteriorating asset quality and moderating growth. While the interest rate cap was blamed for the reduction in the lending slowdown, we believe that the asset quality issues, delayed payments by government (pending bills) and a slowdown in the real economy (i.e. the non-fiscal driven economy) were also key contributors.
From an industry perspective, the banking sector’s capital metrics are strong and have been steadily rising since 2014 and even despite the sectoral challenges, increased in 2020. We attribute this to the decline in dividend payouts, a growth in deposits of about 13.0% and an increase in the holding of government securities as opposed to riskier lending activities (Loan/Deposit ratio 2019:70.2%, 2020:66.9%).