Banks within the East African Community (EAC) are expected to register significant growth and expansion over the next two years, a new study on bank credit issues has indicated.
This is attributed to a robust Gross Domestic Product within individual partner states, according to the report themed; “East African Community: Credit Issues for Banks.” It was conducted by Moody Investment Services.
The report, released yesterday, indicates that the sector will experience balance sheet growth of between 15 and 20 per cent annually over the next two years.
Profitability metrics will remain broadly stable, as increased revenues will be offset by declining interest margins, rising operating costs and high loan-loss provisions.
Weak asset quality will remain a credit negative while non-performing loans (NPLs), which currently range between five and 10 per cent, will reduce further by 40 per cent.
“We see the main drivers of this expansion being robust GDP growth, the region’s ongoing integration and greater banking penetration facilitated by the mobile money revolution,” Constantinos Kypreos, Moody’s Vice President and Senior Credit Officer, said in a statement.
According to Kypreos, more growth will be posted largely by the Kenyan banks thanks to their effective, cross-border networks and advanced mobile technology capabilities.
According to the International Monetary Fund (IMF), the EAC’s GDP growth will be a 6.6 per cent in 2014 and 6.7 per cent in 2015.
This will facilitate banking expansion through greater business opportunities and stronger credit and loan demand.
The establishment of a Common Market in 2010, facilitation of the free movement of goods, labour, services and capital; and, the signing of a protocol outlining a 10-year roadmap towards monetary union will be the key drivers of growth of the financial sector.
Faustin Rutayisire, the Head of institutional banking at Access Bank Rwanda, said the integration process is creating new business opportunities for the region’s banks, mainly in trade, finance, infrastructure project lending, and foreign-exchange services.
The extensive use of mobile technology to transfer money has helped broaden financial services across the region.
The new technology has also increased financial inclusion and lowered the cost of transaction.
However, according to the report, the banking sector will continue to face significant challenges, including access to modern ICT infrastructure.
Poor economic diversification and high reliance on commodity exports, under-developed administrative and judicial institutions are also challenges banks across the region must brace for.
Bond markets remain shallow, constraining banks’ ability to raise long-term funding and this is likely to remain a challenge, according to Carolyn Henson, Research and the author of the report.