Kenya’s banking sector remains stable with enough capital and liquidity to withstand shocks, but risks are rising rapidly from global forces, the Central Bank of Kenya said in its latest financial stability report.
In the report, the central bank warned that while banks currently have “sufficient buffers,” dangers are mounting from rising interest rates, worsening loan quality, paper losses on holdings, and cyber threats.
Globally, the report highlighted “stress in financial markets and collapse of four regional banks in the US as well as takeover of Europe’s second largest bank, Credit Suisse.” It said financial stability risks have increased worldwide “the most since the global financial crisis.”
Domestically, spillovers from interest rate hikes are causing ripple effects, the report said.
“Interest rates have risen rapidly, capital outflows have increased, exchange rate remains under pressure, fiscal vulnerabilities remain, cost of living remains high for households’ impact negatively on savings and consumption, and inflation is still an area of policy focus,” the report warned.
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As rates rise, risks include deteriorating loan quality, losses on securities holdings that will have to be marked down in value, and slower credit growth as borrowing becomes more expensive, the regulator said.
“Further increase in interest rates in response to monetary policy tightening is expected to push the cost of borrowing much higher, leading to deterioration in assets quality, and slowdown credit uptake, and increase in revaluation losses on repricing of interest rate sensitive assets, which will erode capital,” the report said.
Cyber threats are also increasing with digitalization of finance, regulators noted.
“Increased automation and digitalisation have introduced cyber security threats as well as being used as conduits for AML-CFT channels,” the report said, referring to anti-money laundering and counter-terrorism financing efforts.
While Kenya’s banks remain stable for now, “there are however some banks that require to build more capital to deal with these risks,” the report cautioned.
It urged financial institutions and regulators to remain vigilant and ready to intervene.
“In view of these unsettling macrofinancial conditions, policy makers, regulators, authorities, and other players must remain vigilant and take appropriate measures to intervene and mitigate the risks for macrofinancial stability in 2023 and beyond,” the report concluded.
Central bank also warned that collaboration will be key. “Collaboration with other stakeholders, locally or abroad would be critical in dealing with these risks,” the report said.
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