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Banks in poor financial condition rise to 13 per year
Wednesday, May 17, 2023
Governor of the Central Bank of Kenya Patrick Njoroge addresses members of the Finance Committee of the National Assembly on December 1, 2022. Photo | Lucy Wanjiru | NMG
The number of ailing commercial banks in Kenya rose to 13 last year after more lenders failed to maintain required levels of capital that act as a buffer against a bank run, underlining the task ahead for the new central bank chief.
This shows an increase of 44 per cent compared to the nine lenders found to have breached critical supervisory and regulatory requirements in 2021, according to a new report from the Central Bank of Kenya (CBK).
The Central Bank of Kuwait, which did not name the affected banks, said the financial abuses it found included excessive lending to a single borrower, excessive lending from within, excessive lending to the real estate sector, excessive exposure to foreign currencies, and failure to set aside. Adequate capital for high-risk loans.
“During the year ending December 31, 2022, 13 commercial banks violated the Banking Law and the Central Bank of Kuwait’s prudential directives, compared to nine commercial banks in the previous year 2021,” the Central Bank of Kuwait said in its Banking Supervision Report 2022.
The data also gives a perspective on how the liquidity crisis, exacerbated by the imbalance of the forex interbank market, has driven down some banks’ core capital levels, leading to several breaches in their capital and liquidity ratios.
Most of the violations were related to capital adequacy requirements, which are ratios used by the Central Bank of Kuwait, the financial sector regulator, to assess the financial position of a commercial bank.
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For example, 10 banks violated the requirement that they lend no more than 25 percent of their core capital to a single borrower.
This lending limit, known as the sole obligor limit, is intended to reduce the bank’s exposure to a single borrower in the event that the borrower defaults on debt.
“Most of the violations were related to breaching the individual obligor limit mainly due to the decline in core capital in some banks that continued to report losses,” the Central Bank of Kuwait said.
In 2021, the Central Bank of Kuwait report showed that only eight banks breached this limit.
Central Bank of Kuwait data also shows that eight banks incurred a pre-tax loss last year, up from five banks in 2021.
In the review period, eight banks were found to have breached the legal requirement to maintain core capital of at least eight percent of total deposits. This was an increase from three in 2021.
Five banks, up from three in 2021, have been found guilty of lending more than 20 percent of their core capital to one of their employees.
“What’s happening globally flows into our market. And that has to do with, for example, market losses. Right now, if you can get inward loans at five percent and outwardly they’re offering at 24 percent, it’s more profitable to get So you’ll find that loans from within grow beyond borders,” said one analyst who declined to be on the register.
During the review period, employee lending by three banks exceeded the statutory limit of 100 percent of the core capital. This was an increase of two in 2021.
The core capital of the two banks fell below the required minimum of Sh1 billion. This was down from three in 2021.
Some analysts believe that the continuous deterioration in capital and liquidity ratios indicates that the Central Bank of Kuwait is asleep at work.
For example, the Central Bank of Kuwait gives banks the ability to do risk-based lending, but then they don’t give them ceilings. “So, it means the banks are free to do whatever they want,” said an analyst, who asked not to be named. The Central Bank of Kuwait has been buzzing about banking sector analysts commenting on the goings-on of the industry.
The Banking Supervision Report 2022 did not mention any of the banks that violated the capital adequacy ratios.
In the period when traders denounced the dollar shortage, it was found that three of them failed to maintain foreign exchange exposure at less than 10 percent of their core capital.
However, last year First Community Bank, which has since been taken over by Somalia’s Premier Bank, disclosed a shortfall of more than Sh1 billion in seed capital, or shareholder money.
Teacher-owned Spire Bank, which was taken over by Equity Bank, also breached most of its capital and liquidity ratios as the lender slipped into a loss of Sh10 billion.
A few banks also violated the requirement to have sufficient loans and other risk-weighted assets to set the minimum amount of capital they could hold, otherwise known as risk-weighted assets.
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With an unsecured loan, for example, the bank needs to own more risk-weighted assets than a secured asset.
Five banks did not achieve total capital to total risk weighted assets of 14.5 percent.
Another bank failed to meet the minimum capital adequacy ratio of 10.5 percent for core capital to total risk weighted assets in the review period.
Three banks failed to meet the minimum liquidity ratio of 20 percent.
Lenders also violated overinvestment in real estate, land and buildings, beyond legal limits.
Tight liquidity saw financial institutions borrowing from the lender of last resort surge, with the Central Bank of Kuwait’s advances to commercial banks rising from Sh71.8 billion in June last year to a record high of Sh111.7 billion by the end of December.
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