Kingdom taps into CBK funds of 20 billion shillings for loans


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Kingdom taps into CBK funds of 20 billion shillings for loans


Kingdom Bank. FILE PHOTO | NMG

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Summary

  • Kingdom Bank is using some of the 20.9 billion shillings it received from the CBK to make loans, a strategy that aims to improve cash returns on which it does not incur interest charges.
  • Most bank loans denominated in Kenyan shillings have an effective cost of more than 15% per annum, including interest and fees.
  • Kingdom Bank’s loan portfolio shrank to 4.4 billion shillings last year from 5.5 billion shillings in 2020, with the change in strategy expected to reverse the trend.

The Kingdom Bank is using part of the 20.9 billion shillings it received from the Central Bank of Kenya (CBK) to provide loans, a strategy that aims to improve returns on cash on which it does not incur interest charges.

In addition to loans, the funds will be used to support liquidity. The move to using some of the money to issue loans was disclosed by Kingdom’s parent company, Co-op Bank, in its annual report.

“Kingdom Bank… has changed its business model of managing government securities originally held at amortized cost to allow for a more aggressive approach to funds received from the Central Bank of Kenya to be used to lend to customers on an as needed basis, improve position liquidity and revive the bank,” Co-op Bank said.

Most bank loans denominated in Kenyan shillings have an effective cost of more than 15% per annum, including interest and fees.

This makes loans more cost effective compared to cash management alternatives such as investing in treasury bills and time deposits which yield less than 10% per annum.

Kingdom Bank’s loan portfolio shrank to 4.4 billion shillings last year from 5.5 billion shillings in 2020, with the change in strategy expected to reverse the trend.

It will also bring balance to the institution’s asset mix, which is concentrated in government debt securities at 23.6 billion shillings or 74.3% of total assets in December.

The interest rate of the CBK loan, repayable in 10 years with a moratorium of three years, is zero.

This means that Kingdom Bank is likely to generate substantial profits from cash, which will allow it to become a strong stand-alone institution.

The regulator’s waiver of interest on the funds underscores its unprecedented support for the lender which was acquired by Co-op Bank in a bailout deal.

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