Analysis of Barclays Bank of Kenya Financial Performance

At the core of every credit leading institution, there is a possibility of both the lender and the borrower being subjected to credit risk. In Kenya, for example, the credit market has been evolving at a slow rate and the same scenario is experienced in other East African countries. These conditions expose lenders and borrowers to higher credit risks and possible loss of part of the investment capital. It is true from the report released by the Central Bank of Kenya in 2015 that many financial institutions experience high rate of loan defaults, and Barclays Bank Kenya has not been an exception.

Although financial markets still find it difficult to use the 2015 report by Central Bank of Kenya when it comes to gauging the level of credit risk that comes with lending, many financial institutions including Barclays Bank Kenya suffered capital fluctuations following the borrower’s deliberate decisions to either delay or fail to pay back the borrowed finances (Central Bank of Kenya 2015). The situation became even worse in 2016 when domestic borrowing became higher than the amount interest earnings.

Despite the credit risk challenges, Barclays Bank of Kenya still has an asset ratio of 31, which is way above the recommend industrial ratio of 28% (Central Bank of Kenya, 2015). In comparison to others foreign owned banks, the asset quality was less by 10% of the standard measure (Mwega 2009). The efficiency of managing credit is very vital and has severe ramifications in the entire financial performance. Credit creation is the main activity that financial institutions including Barclays bank use to generate income (Darrell, 2012).

Barclays bank has faced a lot of difficulties over the years for various reasons. However, the outstanding challenge that the bank faces is directly related to lack of credit standards for borrowers and guarantors (Bolton 2011). The specific factors that contribute towards the credit risks include “poor loan appraisals,” “ignoring the set credit standards and policies,” “poor portfolio risk management,” “lack of considering changes in economic,” and factors that promote loan defaulting among borrowers (Bolton 2011). Non-performing loans result from lax procedures used in assessing and managing credit risks. Other factors include lack of consistent monitoring of credit facilities, inadequacy in trained personnel, and high concentration of credit in leading sectors such as tea export (Bolton 2011). Lack of aggressive personnel to collect credit is another major factor that has affected the bank’s ability to improve its profit margins.

Barclays Bank of Kenya has set up credit policy guidelines for making investments and lending decisions in an attempt to manage its credit risk. The credit policies that have been set by the bank are the key determinants on the level of debtors. This helps the institution to come up with appropriate decisions regarding lending in order to maximize on the revenue collection. For example, the company has a loan appraisal process and control systems that are necessary when assessing loan applications. The assessment procedure guarantees the bank on recovering the total loan portfolio as per the bank overall integrity. Boyd (2010) confirms on the need to establish a well stipulated credit risk environment, engage in appropriate credit lending processes, incorporate good credit administration and financial evaluation, and develop effective tools for monitoring and controlling extreme changes in business activities.

Financial performance can be defined as measuring of the firm’s policies and operations in monetary terms. It can be observed as a measure of the firm’s level of financial health over a set period of time (Saunders 2010). Barclays bank cited earnings as the major predictor of its banks financial health. The activities of Barclays Bank – Kenya are regulated by the Central Bank of Kenya (CBK), which became into operation through act of parliament.

Table 1: Barclays Bank of Kenya - Credit Criteria

Credit Criteria

Percentage

Reputation by character

14

Experienced business executives

13

Future cash-inflows

13

Repayment capabilities

13

Sufficient equity

12

Potential for long term success

10

Effects of Business Affiliates

11

Total

100

Source: Barclays Bank Report 2016

The table above represents the customer’s reputation and credit history.

Table 2: Barclays Bank of Kenya - Rate of Credit Worthiness

Credit Worthiness Rating

Percentage

Overdue Repayments

20

Delinquent Repayments

14

Insolvencies

19

Accrued Repayments

14

Length of Credit History

10

Fresh Applicants

11

Various uses of credit

12

Total

100

Source: Barclays Bank Report (2016)

Credit worthiness affects the relationship between lenders and borrowers. The above table acts as a guide for rating credit worthiness. On the contrary, the table below shows the extent to which credit criteria influenced loan portfolio quality.

Table 3: Credit Criteria versus Loan Portfolio Quality

Extent

Frequency

Percentage

Moderate

2

24

Great Extent

4

29

Very Great Extent

8

57

Total

14

100

Source: Barclays Bank Report 2016

The relationships identified in the table can be represented graphically as shown below.

The results above shows that both Barclays Kenya and the parent financial institution observe the credit culture that can be defined as credit risk management framework. Despite such a business culture, the result has established that credit risk management affect financial performance of Barclays Bank. However, through effective credit managements the company may have the opportunity to reduce the level of non-performing loans so as to improve the overall financial performance. The loan appraisal process should a major should be a major factor to consider when lending since in the long run it will influence the financial performance of the bank. Lending requirements greatly influences the financial health of the bank. In this regards the collaterals or security should be efficiently and properly valued so that incase the borrower defaults the loan agreement they can be auctioned in real time in order for the bank to recover its initial capital. Debt recovery process should be managed on a daily basis to avoid unguaranteed in efficiencies in the loan portfolios at risk. The bank should create a follow up strategy, for example by issuance of demand letters to Non-Performing Loans (NPL)

PART TWO

In Macroeconomic policy, “Gross Domestic Product (GDP)” is one of the indicators of the state of an economy in any country in the world. The remaining other two indicators are interest rates and inflation rates (Adusei 2015). These factors affect the manner in which the citizens tend to utilize the financial sector. An efficient and favorable macroeconomic activity should lead to an increase in financial inclusion of a population.  Higher income levels, for instance, call for higher savings which will be held in the financial accounts (Adusei 2015). Honohan (2008) realized that economic development is a result of an increase in the level of financial inclusion. This should change significantly after controlling the GDP and Inflation.

The GDP growth enhances profitability in the economic markets which in turn enhances stability (Kosmidou 2008). This is because an increase in GDP is as a result of improvement and a rise of income levels in an economy, which is brought about by an increase in financial inclusion. GDP growth can also lead to a reduction in profit margins which has a negative impact on the economic stability. Such an occurrence happens after an improvement in economic growth which in turns offers conducive environment for transacting business, lowering the set standards set aside for bank entry in the market. Such a situation will always cause stiff competitions in the economy.

The increased competition in the banking sector will reduce profitability because of the revenue sharing by the many players in the market. The implications of a reduction in profits are a reduction in economic stability. The government of Kenya is adopting and expanding irrigation infrastructure which highly reduce the volatility of agricultural output within a very short period of time. This will increase the GDP level and in turn lead to economic growth.

Another macroeconomic trend the government is adopting expansively is electing new power plants using a combination of geothermal energy, Co-generation, Coal plants and liquedified natural gas which will become operation within the next five years. This will ease the overreliance on hydropower by Kenyans which has caused a lot of in efficiencies due to rationing. The government is trying to increase the GDP growth through fiscal harmonizing. In the past years the country’s fiscal position who a question worth debating due to rampant corruption cases that were being experienced while trying to implement the investment in public infrastructure. Realizing devolution has been a downward risk but the government is extremely committed to correct this inefficiency in the economy on a medium or a short term base.

More lending increases the level of investments in goods and services production which leads to an increase in the GDP of a country (Obamuyi, Edun & Kayode 2010). On contrary, reduced commercial bank lending reduces the level of investments in the production of goods and services therefore reducing the level of GDP. This is the symbiotic relationship between the credit risk and economic growth. In one way or another two factors interdepend on each other. Louzis, Vouldis & Metaxas (2010) came with a different opinion. He suggested that lending was not an automatic means of economic growth. The scenarios within which the loans are given out are the factors contributing to economic growth. This is due to management of the credits by both the bank and the borrower.

Liquidity in the market refers to the liquid assets that are held by a bank over a period. Excessiveness in the level of liquidity is an influential factor in determining the rate of interest rates. In situations where the liquidity tends to be in excess and the banks have surplus funds to lend, indicates that the marginal cost of mobilizing deposits is very high and the marginal benefits in return are very low. Interest rates also affects the Treasury bill rate ( this is interest rate on a 91-day government debt instrument) The T-bill rate is used as a bench mark or reference for any  credit referencing ( Samuel and Valderrama 2006). In kenya, lending rate and deposit rate are always referenced to this rate. An increase in bill rate subsequently leads to a higher rate as it increases the financing cost.

Mortgaged- backed securities (MBS) have a low level of credit risk depending with the prevailing level of interest rates. The credit risk is low because they are supported by the government which has a very low risk of defaulting on its credit. But MBS is very sensitive to changes in the rates of interest. This can be classified in two ways; A steep rise in the level of interests causes the prices to fall and vice versa ceteris paribus. The latter causes the mortgage owners to dig deeper in their pockets and refine refinance their mortgages.

PART THREE

Competition can be defined as a rivalry in which every seller tries to get what other sellers are seeking at the same period of time. That is more sales, more profit, and market share by offering the best combination package for price, quality and service delivery (Allen and Gale 2000). in a free competitive market, the information should be readily available hence there is a need for a regulatory function in order to effectively  balance between demand and supply.

Competitors are organizations or institutions that offer the same, similar, or perfect substitutable products or services in the business market that a particular company tends to operate from (Wheelen and Hunger 2006). Porter (1985) came up with forces that influence the level of competition in a certain market and subsequently affecting the profit margins of the firms that are in that particular industry. The forces were then combined to form the famous ‘Porters five force model’. This model ideally deals with off industry factors that influence the level of competition. This model further indicates that a firm has to fully understand the market dynamics in order to compete in a healthy and effective manner. These forces include “threat of new entrants,” “threat of substitute products,” “intensity of rivalry,” “bargaining power of suppliers,” and “bargaining power of sellers” (Porter 1985).

“Porters Model of Competitive Forces” (Porters 2008) identifies the best managerial tactics that can be used to realize a long term set objective. Competitive rivalry in and industry plays a critical function in coming up with determinant strategy to be developed by the organization. For a financial institution to be competitive, we have to factor in the counter reaction of competitor anytime when developing these strategies. This will help the set strategy to yield and hit the set target.

THREAT OF NEW ENTRANTS

            Porter (1980) identifies the determinants of barrier to market entry as; economics of scale in terms of the size the firm and the level of operations in the firm, for it to operate effectively and competitively. There should be an improvement in the distribution channel in order to reach the customer base in real time. The model identifies the level of product differentiation being put in place, rebranding of the image and the degree of reliability, and switching of products and customer loyalty as some of the factors that improve customer satisfaction (Mathooko, 2013). Other indicators include the capital requirements in terms of the size of cash and financial resources available to run the day to day functions of the firm.

POWER OF SUPPLIERS

            In a competitive market, the suppliers always have a bargaining power since they have a variety of choices in the market. They affect the competition through input factors which improves the price and deduct the ability of unit value quality (Weele, 2005:432). They can also achieve this through tampering with the profits of the firms existing in the markets.

POWER OF BUYERS

In order to maximize on their profits margins, financial institutions can decide to use their customers. This is because buyers have a great and significant influence the way the institutions operate in the prevailing markets. This can be through the level of demand of certain products. Porter (1980:71) argues that the suppliers of a certain industry may be powerful in areas where they are more than their customers who have little or no significant stake in the business. Such situation happens since the customers do not represent a major or a long term relationship with the firm.

AVAILABILITY OF SUBSTITUTES

Availability of substitutes affects the level of competition because every firm will have to have its products and services preferred by their customers (Waema & Ngonzo 2014). In turn this will affect the profitability achievement by these firms in case a customer decides to consume a substitute instead of the industry’s product.

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