In 2023, Kenya’s banking sector showcased impressive resilience and growth despite global and domestic challenges.
This is according to KBA 2023 Banking Report seen by Moneyspace
As the economy navigated slower growth rates, the banking industry remained a crucial pillar, adapting and thriving in a dynamic environment.
This article breaks down the key developments in the Kenyan banking sector in 2023, making the complex simple and easy to grasp.
Kenya’s economic resilience in 2023
Kenya’s economy grew by 4.8% in 2022, a slight decline from the 7.6% growth recorded in 2021.
This shift reflects the rebalancing of the economy, with the service and industrial sectors growing, while agriculture faced challenges.
Despite these shifts, the Kenyan banking sector proved its strength and adaptability.
What does this mean?
- Rebalancing effect: The shift in economic growth indicates that while some sectors like services and industry flourished, others, particularly agriculture, struggled.
- Resilience: The ability of the banking sector to continue growing despite these challenges demonstrates its resilience.
Growth in the banking sector’s assets
The total assets of Kenya’s banking sector grew by 8.2% in 2022, reaching Kshs. 6.5 trillion.
This growth was primarily driven by an increase in loans, advances, and investments in government securities.
Understanding asset growth
- Large banks lead: Large banks led this growth with a 9.1% increase in assets, while smaller banks saw a decline.
- Investment shifts: There was a noticeable shift from investments in government securities to more loans and advances, reflecting changes in bank strategies and the operating environment.
A closer look at loans and advances
Loans and advances saw significant growth, increasing by 12.5% to Kshs. 3.6 trillion.
This growth was most pronounced in large banks, which expanded their loan portfolios by 14.7%. However, smaller banks experienced a 2.9% decline in lending.
Deposits and liquidity: A stable foundation
Deposits in the banking sector grew by 13.1% in 2022, which outpaced the growth in loans.
This increase in deposits enhanced the sector’s liquidityLiquidity refers to the ease with which assets can be converted into cash without significantly affecting their market price. This concept is crucial ... ..., making it more robust and stable.
Key points to note
- Increased Deposits: Large and medium-sized banks saw significant deposit growth, which boosted their liquidity.
- Loan-to-Deposit Ratio: The loan-to-deposit ratio increased to 73.7% in 2022, indicating that banks were lending more of their deposits compared to previous years.
Asset quality: Improvement amid challenges
The asset quality of the banking sector improved in 2022, with the ratio of gross non-performing loans (NPLs) to total loans declining from 14.4% in 2021 to 13.7% in 2022.
Breaking down asset quality
- NPLs: Non-performing loans are loans that borrowers are not repaying on time, and a lower NPL ratio indicates better asset quality.
- Tier Differences: Smaller banks continued to struggle with higher NPL ratios, while larger banks showed improvement.
Profitability: A robust financial performance
In 2022, the banking industry’s financial performance was strong, with total pre-tax profits rising by 23% to Kshs. 241.52 billion.
This growth reflects a recovery from the impacts of the pandemic, with banks seeing increased returns on both assets and equity.
Key insights into profitability
- Return on Assets (ROA): ROA increased to 3.7%, up from 3.3% in 2021, indicating that banks were using their assets more effectively to generate profits.
- Return on Equity (ROE): ROE also rose to 26.5% in 2022, showing that banks were delivering higher returns to their shareholders.
Sustainable banking: A growing focus
Kenya’s banking sector made significant strides in adopting sustainable finance practices.
By the end of 2022, over 44,000 bank staff had undergone training in sustainability, focusing on inclusivity, financial literacy, and support for small and medium-sized enterprises (SMEs).
What is sustainable banking?
- Balancing Profit and Responsibility: Sustainable banking involves making business decisions that are profitable while also considering their impact on society and the environment.
- Capacity Building: The sector invested heavily in training to ensure that bank staff are equipped to implement these sustainable practices.
The road ahead: Challenges and opportunities
While the Kenyan banking sector is strong, it faces several emerging challenges, including rising inflation, concerns over public debt, global market volatility, and banking fraud.
However, the sector remains well-capitalized and liquid, positioning it to navigate these challenges effectively.
Preparing for the future
- Monitoring risks: Banks are closely monitoring risks related to inflation and debt to stay ahead of potential challenges.
- Sustainable growth: The continued focus on sustainable banking practices is expected to drive long-term positive change in the industry.
Conclusion: A resilient and adaptive sector
The Kenyan banking sector in 2023 demonstrated its resilience and adaptability in the face of economic challenges.
With strong asset growth, improved profitability, and a commitment to sustainability, the sector is well-positioned to continue supporting the country’s economic development.
As you look ahead, the focus on sustainable practices and risk management will be key to maintaining this momentum.
