Are Kenyan banks ready for IFRS 9?

Kenya has seen significant progress in financial inclusion over the years, with over 75% of adults now having access to banking and other formal financial services. This places the country among the most financially included nations in Africa. However, recent developments such as price controls on interest rates and the implementation of IFRS 9 guidelines have posed significant challenges for the banking sector in Kenya. Habil Olaka, CEO of the Kenya Bankers Association, discussed these issues in a recent interview with CNBC Africa. Olaka highlighted the impact of these changes on the industry and the need for banks to adapt to the evolving financial landscape. Financial inclusivity has been a key focus for Kenya, with significant progress made over the years. According to the Fin Access survey, the percentage of Kenyans excluded from the financial system has decreased from over 40% in 2006 to just 17.4% in 2016. In the same period, the percentage of Kenyans formally included in the financial sector increased from 25% to 75%. While there have been notable achievements in financial inclusion, Olaka pointed out that the sector faces challenges that could impede further progress. One of the key challenges mentioned by Olaka is the impact of price controls on interest rates. The capping of interest rates has slowed down the growth of financial inclusion in Kenya, making it harder for banks to extend credit to certain segments of the population. Additionally, the implementation of the IFRS 9 guidelines, which took effect in January 2018, has required banks to adjust their existing models for loan provisioning. This has raised concerns about the ability of smaller banks to weather turbulent times and remain sustainable in the post-IFRS 9 era. Olaka emphasized the importance of banks identifying specific niches and conducting predictive risk analysis to assess the probability of loan default. Smaller banks, in particular, may face challenges in booking higher provisions at the point of entry, given their riskier loan portfolios. Olaka highlighted the need for banks to reevaluate their business models and find ways to maintain sustainability in a changing regulatory environment. In light of these challenges, banks must strike a delicate balance between regulatory compliance and financial inclusion. The Know Your Customer (KYC) requirements and other regulatory measures such as the POCAMLA and FATCA present challenges for banks in profiling borrowers and mitigating risks. As banks navigate these regulatory hurdles, they must also find ways to include excluded customers while upholding stringent regulatory standards. The conversation around revisiting the Banking Act of 2016 has gained momentum, with stakeholders acknowledging the need for a review to better address the challenges facing the sector. The current law, according to Olaka, has not effectively achieved its intended purpose of providing affordable credit to vulnerable segments of the population, such as SMEs and low-income earners. Olaka supported the call for a reevaluation of the law to ensure that it meets the needs of both consumers and financial institutions. In response to these challenges, banks have been exploring various options to improve the pricing and transparency of credit products. The use of credit reference bureaus (CRBs) and credit information-sharing mechanisms has enabled banks to better assess the creditworthiness of borrowers and tailor pricing accordingly. Transparency initiatives, such as platforms that allow customers to compare prices across the sector, are also helping to create a more competitive credit market. As the banking sector continues to evolve, stakeholders must collaborate to address the challenges and opportunities presented by the changing financial landscape. Adapting to regulatory changes, enhancing risk management practices, and fostering innovation will be key to navigating the future of banking in Kenya.