More Dying East African Banks In 2018 Could Be A Restructuring Opportunity

Kurt Davis Jr.
Written by Kurt Davis Jr.

Regional East African banks are coming under pressure from multiple angles. Economic growth slowed across the region, excluding Ethiopia, with Kenya feeling the greatest weight.

The ratio of non-performing loans (NPLs) on regional balance sheets have driven closure of numerous banks in 2017 and will likely underwrite the death of more banks in 2018.

Regulatory authorities are having an effect too, for example, by boosting core capital requirements with markets lacking the equity capital to meet the needs of local banks.


Kenya banks are garnering the greatest attention from investors watching the space. The banks are going to local markets for debt to fund their base capital needs after new accounting standards eroded balance sheets.

Interest rate caps also compound the situation as local banks struggle to balance serving all risk categories of clients against a lower interest rate.

Recent banking data from regulators as well as the region’s largest lenders show a rising ratio of NPLs in the past year, with businesses and households still reeling from two presidential elections and a rapid slowdown in capital inflows and growth in the fourth quarter of 2017.

The fire-sale pressures associated with the retailer Nakumatt and the public rancour from its suppliers and lenders underscore the growing concerns with Kenyan lending markets. The restructuring of the Kenya Airways debt last year only created additional angst.

Kenya Commercial Bank (KCB) was a player in the debt structure of both entities and unsurprisingly has made efforts to restructure itself this year after such losses in 2017. Equity Bank—active in Kenya, Tanzania, and Uganda, among other countries—saw an estimated plus-50 percent growth in NPLs in the first half of 2017.

Numerous small and medium enterprise lenders, according to investors, are seeing NPL ratios north of 50 percent on the balance sheet. Some analysts privately believe the SME lending space is nosediving, with several banks barely able to survive 2018 without some national economic recovery that trickles down throughout the entire system.


The Tanzanian situation is not significantly better than the situation in Kenya. The underlying data suggests that NPLs in the country represent more than double the five percent country benchmark.

The adoption of similar accounting standards (as seen in Kenya) also continues to erode the balance sheets and create a capital need for local banks. Data suggests that a number of local banks have or will also pass the 50 percent NPL ratio level.

Contrary to the Bank of Kenya, the Bank of Tanzania, however, cut the reserve ratio requirement for banks, theoretically a monetary easing method to bolster lending in the economy.

The little market analysis to date suggests that more capital in the lending market will not be helpful if the local population are still generally struggling against tough economic headwinds.

Tanzanian president John Magufuli already ordered the Tanzania Central Bank to not bail out struggling banks. The public stance aligns with Magufuli’s stern (sometimes combative) stance with the private sector.

He has earned a reputation for picking (legitimate?) fights with manufacturing and mining companies among others. Thus, his position that many banks should fail, with only the strongest surviving, is not necessarily a surprise.

The surprise may be that Magufuli actually fast-tracked the removal of some under-performing banks by requesting their licenses be stripped for extremely poor performance.

The banking and overall economic environment will thus likely remain contentious throughout 2018.


Uganda is facing similar troubles but with different results. NPLs came down in 2017 but with a rise in default rates. The rise of default rates arguably suggests that some local companies are beyond NPLs as it relates to their performance, and they are struggling.

The Bank of Uganda nevertheless cut its lending rate to 10 percent from 11 percent to encourage more private capital to the market. Local banks privately question whether a boost in private sector lending is the solution, as the data shows a troubling long-term trend with NPLs and default rates for the country.

The Bank of Uganda is arguing that the greater default rates are related to the agriculture sector, thus subtly downplaying any greater concern for the larger Ugandan market.

Yet, economic growth projected to reach nearly six percent in 2018 (compared to sub five percent in 2017) may not be sufficient to save the private credit market, which is still reeling from low growth in 2016 (barely above two percent).

Data from regional banks, including Equity Bank, operating across East Africa show that Uganda is struggling, but the credit market itself was already smaller than neighboring Tanzania and Kenya and consequently with less capital at risk. Being small, however, does not prevent a growing NPL problem (it only minimizes the impact).

Should East African banks restructure in 2018?

The current situation is ripe for restructuring in the region, with analysts suggesting that many banks should take a page from the Bear Stearns era of 10 years ago. Splitting good assets from bad assets to create surviving ‘good’ banks and disposable ‘bad’ asset pools could benefit the region.

Such a splitting of asset pools may release the acquisitive nature of some regional banks, especially if private investors inject money into the sector players showing the best management and upside potential.

Governments must also consider how to better align interest between the public and private sectors.

Capping interest rates in order to make lending more affordable to certain risk profiles is backfiring as the implied rate of risk with a significant pool of borrowers is higher than the rate on the debt.

Reducing the potential fall out in any significant economic downturn should be the focus, particularly with current state of lending and economic challenges in the region.

The bad bank scheme, especially if underwritten by new private sector investment, is only appropriate if government officials can minimize bank failures, encourage smart risk taking, and open credit to the highest performing private sector actors.

The current situation fails to manage this risk, begging government officials and private sector actors to do something different.

Kurt Davis Jr. is an investment banker, with private equity experience, focusing on Africa and Middle East. He earned a M.B.A. in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at