Kenya Banking & Financial Services Q4 2018
The Kenyan banking and financial sector has seen declining asset quality as growth remains constrained by interest ratecaps and rising government debt. While we have raised our growth expectations for the sector from 11.1% to 13.7% for 2018 on theback of greater political stability, a number of risks remain. Structurally, weak governance remains a problem in the banking sector,although consolidation and improved regulation are reducing the likelihood of further bank closures. If the government fails tomake the appropriate reforms to fiscal policy and continues to expand the public debt burden, investor sentiment could start todecline amid growing fears of an unsustainable debt servicing bill. This will have knock-on effects for the financial sector which hasacquired government paper with around half domestic debt issued in bonds and bills. Meanwhile, the Kenyan economy remainsvulnerable to volatility in external financial markets. A substantial downturn in China, which is a major financier of Kenyaninfrastructure projects, could weigh on investment into the country. On the upside, a likely removal of the interest rate cap shouldhelp stimulate private sector borrowing even as it makes credit more expensive, enabling banks to improve profitability andencourage them to lend rather than buy government debt.
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