Bad debts lower bank profitability
Banks in the region are seeing a gradual decline in their profits as the number of non-performing loans increases, blamed on the economic slowdown from the Covid-19 pandemic.
In the 2021 East African Banking Trends report from financial services firm Deloitte, the high number of non-performing loans is an issue that will continue to negatively affect bank profits, preventing financial institutions from declining. lend to small and medium-sized businesses who are perceived to be high risk, but who represent the majority of borrowers.
âThe decline in profitability is partly attributable to an increase in deteriorated credit quality which is accompanied by an increase in provisions and a marginal increase in the cost / income ratio.
âAll of this is motivated by the adverse effects of Covid-19 on the economy,â notes Deloitte.
âRigorous credit loss assessments will help banks better assess risk and price their credit facilities. In doing so, banks will be better prepared to mitigate their expected losses. “
Bank of Uganda data shows that the profitability of the banking sector fell from US $ 39.1 billion ($ 11 million) to US $ 844.3 billion ($ 238.7 million) from 883, US $ 4 billion ($ 249.8 million) in 2019 in 2020.
This was caused by an increase in the number of non-performing loans, which rose from US $ 685.7 billion ($ 193.9 million) in December 2019 to US $ 894 billion ($ 252.8 million). in June 2020.
Banks have since adopted alternative revenue generation channels such as digital products to allow them to access more customers.
This has seen customer deposits in Kenya’s banking sector, for example, increase by 8.9%, from $ 34.3 billion in 2019 to $ 37.3 billion in 2020, with the first quarter of 2021 registering a new increase to $ 38.8 billion.
The Tanzanian banking sector is performing relatively better, as evidenced by a gradual increase in profitability and a welcome drop in NPLs since 2018.
According to the Bank of Tanzania, by the end of December 2020, after-tax profit had risen to tsh 414.74 billion ($ 179.5 million) from tsh 351.11 billion ($ 152 million) in 2019.
Customer deposits increased 5% in 2020 to Tsh 23.44 trillion ($ 10.15 billion), while non-performing loans in the country increased from 8.04% in 2019 to 7.73% in 2020.
Asset quality has improved, as evidenced by the decline in the ratio of non-performing loans to gross loans from 10.5% in 2018 to 9.6% in 2019.
âThe improvement is attributed to various actions taken by the Bank of Tanzania, including requiring lenders to improve credit underwriting standards and loan collection efforts,â notes Deloitte.