In what may turn out to be a radical shift in the investment arena, small business enterprises and salaried workers who nurture the ambition of delving into entrepreneurship may find it more difficult than before after Kenya’s leading bank in terms of customers, Equity Bank announced that it was scaling down on unsecured and micro loans effective next year.
The directive, Equity Group CEO James Mwangi said, takes effect in January 2018 to coincide with the compliance of a new set of global accounting rules on loan loss covers.
At a packed investor briefing in Nairobi, the Equity boss said that they were making the decision ahead of the coming into force of the new guidelines, referred to as International Financial Reporting Standard (IFRS)
“We are moving away from unsecured lending. IFRS 9 requires you to use historical ratio to make provisions at point of booking the loan. This is not sustainable with a margin of seven per cent and we are left with no option but to take these drastic measures,” he said.
At the same time, the bank has recorded a drop in its half – year after tax – profit by 7.4%. The lender’s net profit for the period to June 2017 dropped to Sh9.33 billion compared to Sh10.07 billion during the same period last year.
However, the healthy news for the lender which has strong footprints in the region with franchises in Rwanda, South Sudan, Uganda and the Democratic Republic of Congo is that its customer base continues to burgeon with over 11.7 million customers.
The lender’s net interest earnings also dropped by a staggering Sh3.2 billion to Sh17.9 billion from Sh21.2 billion which it posted in June last year — highlighting the impact of the cap on interest rates .
The banks gross volume of toxic loans stood at Sh17.4 billion in June 2017 compared to Sh10.7 billion last year – which is a growth of 62% – while its customer deposits grew by 13.6% to Sh362.7 billion in the period.
Similarly, as the banking sector continues to struggle with revenues dropping following the coming into force of the cap on lending rates which is pegged at 14% per annum, Equity bank has swung its axe in a cost-cutting measure sending home 66% of its employees in South Sudan franchise.
The move, according to the bank, is meant to cushion its “interests” and robustly keep its footprints in the unpredictable South Sudanese market. This has, however, sent shockwaves in the industry with 200 of its 300 workers being affected in the restructuring exercise.
The tough, yet painful lay off, the bank argues, has been occasioned by the closure of more than half of its branches, in South Sudan, Africa’s newest state.
According to the group CEO, only five of the bank’s 13 branches in the war torn country are now operational, which left them with no choice but to send the rest of the staff home.
“The banking industry is going through a difficult environment. Interest rate caps have had effect on the economy and times are quite tough,” Dr Mwangi charged, but was bullish that the industry would weather the storm.
The purge by Equity comes hot in the wake of Kenya Commercial Bank, Kenya’s largest bank by asset also sending home over 500 employees from across its several branches. Old Mutual has also recently been on a lay-off spree.
The capping of lending rates has seen profits fall for the banks, which have, in the past, been accustomed to making huge profits.
Most banks also suspended lending during the intense political period in June, July and August as they embraced “a wait- and- see approach” and financial analysts will keenly be monitoring the industry in the coming months.
