We will continue in 2018 to see more investment in technology-led efficiency programmes as blockchain technology makes headwinds in the sector.
By NURU MUGAMBI
It is said that if you wish to move mountains tomorrow, you must start lifting stones today. In the banking industry, going into the year 2017 seemed as if the mountains faced were insurmountable ‘and would challenge even the strongest of balance sheets –from the Banking (Amendment) Act 2016, ‘and the effects of prolonged drought on the various economic sectors, to the general election ‘and new ‘and arduous reporting requirements. Nonetheless, these numerous developments have been faced, ‘and the industry can reflect on the year that was with mixed fortunes as it plans for a more eventful 2018.
Indeed, the peak of all challenges in 2017 was the new price controls which were arbitrarily set by legislatures bent on teaching a lesson to the industry. As much as the general view was that interest rates in Kenya ( ‘and most Africa countries for that matter) are high, instead of targeting the systemic areas that contribute to the high cost of capital (including the government’s appetite for debt), it was much easier to, with a stroke of a pen, hold accountable one player for all that ails the credit markets.
As much as banks did play a role in the cost of borrowing in so far as their rising operational costs ‘and pursuit of returns by shareholders, it’s safe to say that what was once termed as “the rich man’s bill” (those with collateral ‘and considerable savings are the true victors of the interest rate caps) has only partially delivered on its promise. In a space of about six months after the caps were introduced, more than KSh 13 billion worth of capital was redirected by banks from SMEs to fund government debt ‘and finance larger corporations.
All-time low credit growth
Overall, we have seen the rate of growth of credit to the private sector drop to an all-time low of 1.9 per cent, with dim prospects of reaching the highs witnessed just two years ago –when the rate of lending grew at approximately 20 per cent.
In this controlled lending environment, it is easy to forget that banks exist to lend. In a vice-grip scenario in which banks can only price money within a certain range, banks will lend to less risky borrowers; lenders will also plug the holes that erode shareholder value, which is why we will continue in 2018 to see more investment in technology-led efficiency programmes.
The year of cryptography
If the only thing constant in life is change, then the only thing constant in banking is evolving regulation ‘and competitive disruption. As financiers navigated tighter pricing ‘and ever-increasing policy changes, they also contended with competition from less-regulated, nonbank players giving them a run for their money.Yet still fraudsters ‘and cyber criminals abound, also leveraging on technology to grow their ‘businesses’.
The top buzzwords in 2017 were Bitcoin ‘and its underlying blockchain technology; ‘and most fintechs got a headstart in figuring out how the latter can enhance payments security ‘and efficiency.
Considering Kenya’s respectable reputation of being Africa’s digital innovation hub ‘and the global leader in mobile money, it’s no surprise that local fintechs are quickly innovating around this new technology to make inroads into the banking business.
Banks for centuries have worked with ledgers to keep track of information ‘and transactions. Therefore, if there is an industry that is primed to leverage digital ledgers or blockchain technology, it is banks. However, not much activity has happened in this area so far. If the global finance scene is a gauge, we should expect banks this year to s ‘andbox the enigmatic concept of a shared or communal digital database that eliminates the need for settlement or clearing.
Some practical uses of shared digital ledgers secured with cryptography in banking include:
– Real-time cashless retail or consumer payments;
-Collateralisation (consumer, corporate ‘and public-sector transactions);
– Real-time cross-border transactions (including different currencies);
– LPO ‘and trade finance;
– Real-time international remittances;
– Secondary market transactions (trading of shares, bonds, mutual funds); ‘and
– Streamlining operations.
The realm of possibilities of how blockchain technology can make banking better is endless, especially when you factor in other innovations such as the use of artificial intelligence, machine learning ‘and robotics.
Blockchain in banking
According to IBM, by the end of 2018, 65 per cent of banks worldwide will be either testing or actively using blockchain in their operations.In India, it is expected that also by the end of this year most medium ‘and large-sized banks would have institutionalised artificial intelligence ‘and machine language in several processes, including lending. Overall, these banks expect that such investments in fintech will help lower their transaction costs ‘and enhance operational efficiency while mitigating risk.
Closer home, we should expect banks locally to take more decisive steps up the ‘fintech mountain’- if anything to absorb such disruption as the interest rates caps ‘and to keep in step with innovative nonbank competitors.
Nuru Mugambi is the Director, Public Affairs at Kenya Bankers Association ‘and an Eisenhower Fellow specialising in sustainability.