The lenders’ key source of revenue, interest income, is likely to fall as more loan defaults and late payments are continuously reported in the Kenyan banking system. With the increasing effects of coronavirus pandemic, Kenya is more likely to experience deep economic struggles due to the fall of many businesses. This article will discuss Kenya at risk of falling into a banking crisis due to COVID-19.
The current shock existing in the economy will shortly turn into a deep financial crisis in Kenya. This is because the economy is limited in terms of the amount of credit as well as liquidity it can generate. The incapacity to meet foreign exchange needs is worsening the state of the economy
But how is the virus affecting the Kenyan banking system?
The coronavirus pandemic is already worsening the outlook of the African economy. The growth of the economy is expected to fall by 1.6 % and poverty to increase by 2% wiping off the five years of striving to alleviate poverty by African countries.
What Does This Mean to The Kenyan Banking System?
The stability of the Kenyan banking system is threatened by the increasing impacts of the COVID-19 pandemic. Even though the regulator (Central Bank of Kenya) have taken steps expected to reduce the risks of failure of the banking system, the negative implications are still high. The policy measures include lowering the base rate, lowering the bank cash reserve ratios.
There may be an increase in the level of non-performing loans in Kenya, which may interfere with the stability of the banking system. This means that borrowers, and business operations within the country will be affected. This is because of the deteriorating source of income and revenue which means they will be in less capacity to meet their duties.
Individual institutions like Microfinance Institutions (MFI) are likely to fail. This is because their portfolios will be under pressure since they will have to lend money to households with no assets and volatile income. Such issues will lead to ‘credit crunch’ which will severely affect the SMEs (Small and Medium-Sized Enterprises as well as the microbusinesses. For this reason, the ability of low-income individuals to maintain their livelihoods will be reduced.
What is the implication to the banking system?
If the recovery is not fastened, the damage to the Kenyan banking system and the economy at large could be severe. The banks could become bankrupt or worse, the economic recession could be prolonged than expected leading to the collapse of the banking system.
Finally, how can we save our banking system?
The current outlook of the banking system has negative impacts on low-income individuals, especially now that they are likely to experience reduced trade. There is a need to support the Small and Medium Enterprises and microbusinesses through funding by the commercial banks and individual institutions. International Finance Institutions (IFIs) in Africa should also assist small businesses.
For long term support, to bring back the banking system to its normal state, there will be a need for funding to support the recovery process. The Kenyan government needs to ensure that only viable businesses are supported.