Kenyan banks face turbulence over looming sanctions in South Sudan

Kenyan commercial banks with subsidiaries in South Sudan could be affected by potential United Nations sanctions against anyone who undermines current peace talks in Africa’s newest nation, Central Bank of Kenya (CBK) has warned.

The banking sector regulator has warned policy makers in a report to pay attention to any additional “punitive litigations” against financial institutions, regulators, companies and countries for violating sanctions or breaches of contract.

The UN Security Council said in August that it is considering targeted sanctions against warring parties in a conflict that erupted in December after President Salva Kiir accused his former deputy, Riek Machar, of staging a failed coup. Machar denies the charge.

According to the UN, the conflict has since taken on ethnic dimensions between Kiir’s Dinka group and Nuer tribe to which Machar belongs, as it spreads to oil-producing areas, leaving thousands of people dead and displacing another 1.5 million.

The CBK’s Financial Sector Stability Report 2013 was jointly written by financial industry regulators including Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority, and the Saccos Regulatory Authority (SASRA).

Available figures indicate that by December 31, 2013, 11 Kenyan banks had subsidiaries operating across the East African Community (EAC) member states and South Sudan.

“The largest risk exposure for Kenyan banks’ subsidiaries in South Sudan is the o-going political instability and threats of sanctions from international community against its leaders,” said the CBK report. These subsidiaries had a total of 288 branches as at December last year up from 282 in December 2012.

total assets

A total profit before tax of Sh5.2 billion was realised in the year 2013. However, eight subsidiaries registered losses in various countries in the region. Subsidiaries’ total assets were Sh306.3 billion as at end December last year.

Given the growing cross-border operations among the Kenyan banks, CBK issued prudential guidelines on consolidated supervision which came into effect from January 1, 2013. This has empowered CBK to supervise banking groups on a consolidated basis.

Kenya borders South Sudan and is a member of the Intergovernmental Authority on Development, an East African bloc also known as Igad, which is mediating peace talks in the Ethiopian capital, Addis Ababa, to end the violence.

Igad and the African Union have also said they may place sanctions on individuals who block the peace process. Kenyan lenders operating in South Sudan include Kenya Commercial Bank, which is East Africa’s biggest lender, as well as Co-operative Bank of Kenya, Equity Bank  and CFC Stanbic Holdings.

During its 10th Annual General Meeting held in March this year, the Equity Group Chief Executive told shareholders that a volatile political environment in South Sudan in 2013 had slowed down business for the group, forcing the institution to make a Sh700 million provision to cover possible losses from the subsidiary. The bank had also been forced to evacuate staff in some three states while still operating in East, West and Central Equatorial where things were relatively calm.

“It has been a huge strain for us to manage the South Sudan subsidiary. But things are looking up since the crisis broke out in December last year,”  Equity Group CEO James Mwangi said. Weak performance by subsidiaries in South Sudan and Uganda as well as flat profit levels in Tanzania and Burundi are seen as the factors that made Equity lose its top position to Kenya Commercial Bank.