By Morris Aron

Four banks could be facing serious cash flow and management challenges, the Central Bank of Kenya’s latest bank supervision report has hinted.

In addition, the report indicates that 21 banks, which are said to be in satisfactory condition, are increasingly facing day-to-day liquidity challenges due to their decision to lend out a lot of money towards the end 2011.

According to the latest Bank Supervision annual report 2011, Central Bank of Kenya (CBK) has re-categorised four banks to the ‘fair’ status after evaluating their operations against internationally laid down benchmarks of operations also known as CAMELS.

Eighteen banks—with a market share of 54 per cent and assets worth Sh1.2 trillion remain in the ‘strong’ category—meaning that their operations are above satisfactory. Last year, 20 banks controlling 64 per cent of the market share were in that category.

“Some banks dropped to satisfactory because of reduced liquidity occasioned by increased lending,” stated the report.

“Four banks were rated as fair compared to three in 2010.

Financial risk

By being labelled ‘fair’, CBK is in essence saying that the banks affected have in several occasional flouted laid down banking procedures posing risk to the whole financial system.

The report, however, declines to name the banks citing industry safety reasons.

According to the data, the four ‘fair’ banks have a combined market share of 1.3 per cent and assets worth just above Sh26 billion and are only one category away from the ‘red zone.’

Responding to the report findings, the banking industry lobby body chief executive officer Habil Olaka noted that while there were some operation concerns, the report indicates that all banks have met statutory liquidity requirements, as required by the law.

The re-categorization, which is an international practise by bank regulators, raises pertinent questions in as far as the health of some of the banks are concerned, the risks they pose to the financial system in case they go under and the possibility of the institutions collapsing if not closely watched.

Internationally, bank regulators use the categorization to measure of the relative soundness of a bank. The CAMELS ratings - the term stands for capital, assets, management, earnings, liquidity and sensitivity to market risk - are calculated on a 1-5 scale.

A rating of one, is given to banks with the strongest performance ratings; banks given a CAMELS rating of 4 or 5 are placed on the watch list of banks in need of supervisory attention.

As per the report, the trend last year was that of banks leaning towards the level two and three category.

But even as the level of information begins to flow on the actual amount of risk posed by the affected banks to the entire financial system, analysts warned that perhaps what is of most concern is the increasing number of financial institutions that are facing operational liquidity challenges.

According to the report, a total of 21 banks with a market share of 44 per cent and assets worth Sh890 billion were in the ‘satisfactory’ category under the CAMELS classification as of December 2011.

While satisfactory means the banks are okay, it also means that they regularly flout some of the laid down banking procedures exposing the entire financial system to risks.

Experts say that the admission by CBK in a thinly veiled table and the description of the flaws in the banking industry in less than three paragraphs indicates that the market regulator is acknowledging the flaws in the banking industry, while sending a signal that it can deal with the misnomers.

The annual report also found out that two banks flouted rules governing them by lending an excess of 25 per cent of their core capital to single borrowers.

One bank advanced an unsecured credit facility to an insider against the laid down banking rules set down by the CBK, in notes.

In addition, the Banking Supervision report also noted that one un-named bank invested more than 20 per cent of its core capital in land and buildings against the prudential guidelines.

Worse still, one bank had no internal auditor.

From the report, it is not clear which banks were affected and the decision that the Central Bank took against them for flouting the banking rules and regulations of operations.