(Ecofin Agency) - The central bank of Kenya says it will have to approve commercial banks operating in the country before they can declare and distribute dividends for the fiscal year 2020. The strategy aims to ensure that the lenders have enough equity to deal with the fallouts of the coronavirus pandemic.
CBK’s new move requires banks to assess the ability of their capital to adequately cover risk-weighted assets. With the new international accounting standard for banks (IFRS 9), banks must take into account not only the actual risks but also the possible risks related to the operating environment. Based on this assessment, the Central Bank will now decide whether or not dividends can be distributed.
CBK said its strategy would ensure that banks retain their capital and, as such, enable them to fulfill their fundamental roles. According to analysts from local investment firm Cytonn Investment, the central banks' directive is a precautionary stance to ensure that the banking sector is sufficiently capitalized; this will provide them with the necessary coverage to participate in core banking activities, thereby catalyzing economic growth and development in the country.
Last week, six banks listed on the Nairobi Securities Exchange posted their performances for the first half of the year. Kenya Commercial Bank and Equity Group have significantly increased their provisions for credit risks. Overall credit risk provision for the banks whose results have been analyzed amounts to KSh17.8 billion ($164.5 million), up 165.6% YoY. As a result, the net income was strongly affected. Overall net profit for the banks was 11.9 billion shillings in H1 2020, down 44.39% YoY.
The directive taken by the Central Bank of Kenya is in line with what has been decided by several central banks around the world. To cope with covid-19, they considered that it would not be wise for banks to remunerate their shareholders.