“Cash may be king, but unpaid invoices can quickly dethrone any business.”

For many companies, especially small to medium-sized enterprises, debt collection isn’t just a routine back-office function—it’s the backbone of business survival. Managing receivables effectively directly impacts your cash flow, your ability to grow, and in many cases, your ability to stay in business.

In fact, it’s estimated that 80% of businesses that close within the first five years do so because of cash flow issues caused by bad debts. That statistic alone highlights why it’s crucial to treat debt collection not as an afterthought, but as a key part of your financial strategy.

This blog explores proven, ethical, and scalable debt collection strategies that can help you protect your business and maintain a healthy bottom line.

Cash flow is the engine of your business, and timely debt collection fuels it. Every unpaid invoice is a direct hit to your working capital—affecting your ability to pay employees, purchase inventory, and invest in growth opportunities.

1. Debt Collection: The Lifeline of Cash Flow

Consider a business that tightened its receivables policy after nearly running out of operating funds. By improving how it tracked and followed up on invoices, the company stabilized its cash flow and avoided taking out costly short-term loans. The lesson? Strong collections can literally save your business.

2. Start with Proactive Credit Management

Prevention is always better than cure. Before you even extend credit, establish clear credit policies and terms. Set expectations upfront: when payments are due, what late fees apply, and what happens if invoices go unpaid.

Running credit checks on new customers can flag potential red flags before they become unpaid invoices. Educating your clients early on about your terms helps build trust and reduces the chances of non-payment.

3. Segment and Prioritize Your Receivables

Not all debts are equal. Using an aging report to categorize accounts (e.g., 30, 60, 90 days past due) helps prioritize your collection efforts.

Older and higher-value debts should be tackled with urgency. If you’re dealing with dozens—or hundreds—of accounts, this segmentation is crucial to avoid spreading your resources too thin.

Modern tools and CRMs can help automate tracking and send alerts so nothing falls through the cracks.

4. Master the Art of Communication

When it comes to collecting debt, how you communicate can make all the difference.

• Start with friendly reminders when the due date passes.
• Gradually escalate the tone and urgency, if needed.
• Use multiple channels—email, phone, SMS, and even formal letters.
• Stay professional and empathetic; you’re more likely to get paid by treating people with respect.

Often, a polite but firm phone call can do what five emails can’t.

5. Know the Legal and Ethical Boundaries

Always ensure your collection practices comply with the relevant laws, such as the Fair Debt Collection Practices Act (FDCPA) in the U.S. or other local regulations.

If it becomes necessary to escalate, have a clear policy on when to engage legal action or refer the account to a third-party agency. Keep thorough records of all communications and agreements—these can protect your business in case of a dispute.

6. Leverage Technology to Stay Ahead

Debt collection doesn’t have to be manual or painful. There are powerful software solutions that:

• Automate follow-ups and reminders
• Offer digital payment portals
• Predict which customers are most likely to default
• Provide analytics to track performance metrics like Days Sales Outstanding (DSO)

By embracing tech, you can streamline operations and improve recovery rates significantly.

7. Should You Outsource or Keep It In-House?

This decision depends on your business size, volume of debt, and available resources.

In-house collections offer more control and closer customer relationships, but they can be time-consuming.
Outsourcing to a reputable agency brings expertise and efficiency, especially when dealing with older or harder-to-collect debts.

Weigh the cost against the potential recovery. In many cases, a hybrid model—handling early-stage collections internally and outsourcing more complex cases—works best.

Conclusion: Collect Smarter, Survive Longer

Bad debts are more than an inconvenience—they can be business killers. Effective debt collection is one of the most powerful tools to improve cash flow and ensure long-term sustainability.

Action Point: Review your current collection process today. Whether it’s improving your invoicing system, following up faster, or segmenting your receivables more intelligently—start making small changes that lead to big results.

Because remember:
You can sell all day, but if you don’t collect, you won’t survive.

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Credit appraisal is a crucial process in the financial sector, ensuring that loans are granted to individuals and businesses with the ability to repay. Whether you’re a banker, investor, or business owner, understanding how credit appraisal works can help in making informed financial decisions. Appraising is about evaluation, finding out strength and weaknesses of an applicant. It involves giving a second look on a client proposal for credit, requiring application of mind or use of abundant normal common sense. In this blog, we will explore:

1. What is Credit Appraisal?
2. Principles of Credit Appraisal
3. Strategies for Carrying Out Credit Appraisal
4. Benefits of Credit Appraisal
5. Challenges in Credit Appraisal and How to Overcome Them

1. What is Credit Appraisal?

Credit appraisal is the process of evaluating a borrower’s financial condition and repayment ability before granting a loan. It involves assessing factors such as income, credit history, collateral, business performance (for companies), and market risks. Banks and financial institutions use this process to minimize defaults and ensure financial stability.

2. Principles of Credit Appraisal

To ensure a sound credit appraisal system, institutions follow key principles:

• Character – Assessing the borrower’s reputation, reliability , willingness to pay and credit history. Sources are CRB reports, and reference checks from suppliers and lenders
• Capacity – Evaluating income and ability to repay the loan. It is the measures of whether the borrower has sufficient income or cash flow to meet loan repayment obligations.
• Capital – Reviewing the borrower’s financial position and assets. It is the borrower’s personal or business financial commitment.
• Collateral – Examining security provided against the loan. Collateral is an asset pledged by the borrower to secure the loan and It acts as a backup in case of default.
• Conditions – Analyzing economic and industry factors affecting repayment ability.

3. Strategies for Carrying Out Credit Appraisal

An effective credit appraisal requires a structured approach:

• Detailed Financial Analysis – Reviewing income statements, balance sheets, cash flow report and bank statements.
• Credit Score Check – Assessing past borrowing behavior through credit bureaus reports.
• Site Visits & Interviews – Verifying information by physically inspecting businesses or assets.
• Risk Assessment Models – Using statistical tools for assessments in order to make better decisions in lending.

4. Benefits of Credit Appraisal

A well-implemented credit appraisal process offers multiple advantages:

• Reduces Non-Performing Assets (NPAs) – Prevents bad loans and defaults.
• Ensures Fair Lending Practices – Promotes transparency and fairness in loan approvals.
• Enhances Profitability – Helps banks and institutions maintain a strong financial position.
• Encourages Responsible Borrowing – Prevents over-indebtedness and financial stress for borrowers.

5. Challenges in Credit Appraisal and How to Overcome Them

Despite its importance, credit appraisal comes with challenges such as:

• Inadequate Financial Disclosure – Borrowers may hide liabilities, requiring deeper due diligence.
• Market Volatility – Changing economic conditions affect loan repayment capacity, necessitating stress testing.
• Fraudulent Applications – Using technology like AI and big data analytics can enhance fraud detection.

Conclusion

Credit appraisal is a vital process for financial stability and risk management. By following strong principles, implementing effective strategies, and addressing key challenges, institutions can ensure responsible lending while minimizing defaults.

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A credit policy is a document housing a set of decisions or procedures to be considered when extending goods and services on credit. The purpose of the policy is to answer the following questions;

• Who qualifies for credit? ways of credit scoring or rating customers
• Terms of credit to be considered e.g. loan terms, credit days etc.
• How to collect from customers. e.g. in-house, third-party collectors and legal recovery
• Recovery steps to be taken in case of default.

A sound credit Policy must be formulated to ensure all benefits of extending goods and services on credit are reaped i.e. increased sales and profits. The policy protects the business from possible defaults

Factors to Consider When Preparing a Credit Policy

• Business Strategic goals
• competition terms
• Financial needs of the business
• Profit margins to avoid losses due to cost of credit
• Credit objective of the business
• Risk tolerance
• Management sensitivity to credit risk and loss
• Nature of product or service
• Size and nature of the business

Types of Credit Policies

1. Liberal Credit Policy- It is a generous type of a policy that allows favorable credit terms to customers. It is necessitated by need for, market penetration, increased market share, stock with short expiry date, stiff competition, high profit margin, low demand and threatened market position by competition.
2. Conservative Credit Policy- It is a restrictive policy that is not generous to borrowers and is mainly adopted by businesses that face no or little competition. Condition that may influence this policy are low net profit, high demand for products and services, monopolistic position, established market share, tailor made products, financial position of the company and lengthy production processes.

Contents of the Credit Policy

• Credit mission for the business
• payment terms and condition of credit sales
• Customer credit risk assessment and appraisal
• Collection methods to be used.
• Performance measurement of a credit department
• Loan recovery procedure of overdue accounts, appointment of third party collectors and legal recovery
• Staff responsibility
• Approval by the board.

Adopting a credit policy in a business ensures all customers are treated equally, breeds consistency in the business, portrays a positive business attitude towards customers, eliminates special terms to customers who are not credit worthy and ensures business continuity.

In conclusion a credit policy is a must have for every type of a business in order to reap full benefits of extending credit. To get a sample of a credit policy you can purchase an e-Book THE BOOK: GETTING PAID ON TIME – Tumaini Institute

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A credit Score is a standardized mathematical number which depicts the credit worthiness of a consumer. The first credit score was invented in 1959 by engineer Bill Fair in partnership with mathematician Earl Isaac who formed a company by the name Fair, Isaac and Company which currently goes by the name Fair Isaac Corporation (FICO).

The FICO credit score ranges between 300-850 helping lenders in making lending decision. A high credit score indicates a lower credit risk or a lower probability to default while a lower grade indicates a higher risks implying denial for credit or expensive interest rate on the borrower. FICO score implies the following:

• 800+: Exceptional borrower
• 740-800: Very good
• 670-740: Good
• 580- 670: Fair
• 300- 580: poor

How to calculate a credit Score

Credit score is calculated by considering payment history, total amount owed, length of credit history, type of credit and the new credit requested. Credit score depend on historical data and therefore individuals who have never taken credit have no credit score. The factors used by FICO are calculated as follows:

1. Payment History contributes 35%, timeliness in repayment of loans on time.
2. Credit Utilization contributes 30%
3. Credit history is allocated 15%, customers with long credit history and good payment behaviour are highly scored.
4. Credit Mix 10%, for customers with a mix of credit products like credit cards, auto loans, mortgage etc.
5. New credit is given 10%, checks on how many requests the client has submitted in a short period of time. Every time a borrower makes a credit application they get flagged and may affect the customer rating.
6. Length of credit History
7. Current indebtedness or amounts owed to others in relation to the income of the borrower.

How to improve your Credit Score

A bad credit score can negatively affect a consumer financial ability by being denied a line of credit for being perceived as high risk. However borrowers with a bad credit score can improve their credit score in the following ways:

1. Borrowing and paying on time to build a credit history.
2. Ensure timely repayment towards your loan without delay or missing on our repayment.
3. Maintain your credit limit on all your lines of credit.
4. Maintain a low debt ration to avoid challenges in repaying the loan.
5. Ensure you have a steady source of income when applying for credit to avoid failure on repayment.
6. Avoid holding many credit cards making you rely on debts which may lead to a lower score.

Credit reports issued by Credit Reference Bureaus contains an individual credit score based on whether they have ever borrowed. Therefore it is advisable to access your credit report at least once annually to keep track of your credit score. With introduction of Risk Based pricing, consumers with a good credit score are likely to access credit at a favorable price.

To learn more on matters of credit visit https://creditmanagement.co.ke/trainings/ The author Zipporah Njoroge is a Certified Credit professional by KASNEB.

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Quarter 2, 2022

Overview.

The Quarter 2 Environmental Bulletin was prepared to review the recent economic developments in the international and domestic market. Development of the Environmental Bulletin is for commercial enterprises or organisations seeking out possible opportunities or threats occasioned by both their internal and external environments.

It’s therefore imperative for organisations to adopt to the changing environment to tap the gains.

GLOBAL OUTLOOK

As the world struggles to recover from the challenges occasioned by the Covid-19 pandemic, more challenges abound for the globe. The major issues of concern for the world economy going into the second half of 2022 include:

1. The Covid-19 pandemic
2. Supply-chain disruptions.
3. Lockdown in China.
4. Russia-Ukraine war which has had a significant impact on the world economy.

According to the World Bank’s Global Economic Prospects Report, the global economy is entering what could be termed as a protracted period of feeble growth and elevated inflation.

Global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022. Significantly lower than 4.1% that was anticipated in January, hovering around that pace in 2023-24 as the war in Ukraine disrupts activity, investment and trade. Growth in advanced economies is expected to slow down by 2.5 percent and 2.0 percent in the fourth quarters of 2022 and 2023, respectively. This reflects persistent supply chain challenges, negative terms of-trade shock, weak policy responses and tighter financial conditions.

The war in Ukraine has led to a surge in prices across a wide range of energy related commodities. These higher energy prices will lower real incomes, raise production costs, tighten financial conditions and constrain macro-economic policy especially in energy importing countries.

WORLD ECONOMIC OUTLOOK.

The war in Ukraine has triggered a costly humanitarian crisis that, without a swift and peaceful resolution, could become overwhelming.

Fuel and food price rises are already having a global impact, with vulnerable populations—particularly in low-income countries—most affected. The war in Ukraine will amplify economic forces already shaping the global recovery from the pandemic. The war has further increased commodity prices and intensified supply disruptions, adding to inflation.

Even before Russia invaded Ukraine, broad price pressures had led central banks to tighten monetary policy and indicate increasingly hawkish future stances. As a result, interest rates had risen sharply and asset price volatility had increased since the start of 2022—hitting household and corporate balance sheets, consumption, and investment. The prospect of higher borrowing costs has also increased the cost of extended fiscal support.

Emerging and Developing Europe, including Russia and Ukraine, will see GDP contract by approximately 2.9 percent in 2022, before expanding by 1.3 percent in 2023. The main drivers of the contraction are the impact of higher energy prices on domestic demand and the disruption of trade, especially for Baltic states, whose external demand will decline along with the contraction in Russia’s economy. The influx of refugees is expected to place significant immediate pressure on social services, but eventually the increase in the labor force could help medium-term growth and tax revenues.

Advanced Europe. The main channel through which the war in Ukraine and sanctions on Russia affect the euro area economy is rising global energy prices and energy security. Because they are net energy importers, higher global prices represent a negative terms-of-trade shock for most European countries, translating to lower output and higher inflation.

In the United Kingdom, GDP growth for 2022 is revised down 1 percentage point—consumption is projected to be weaker than expected as inflation erodes real disposable income, while tighter financial conditions are expected to cool investment.

Middle East and North Africa, Caucasus and Central Asia: Countries in the Middle East, North Africa, Caucasus, and Central Asia regions are highly exposed to global food prices, particularly the price of wheat, which is expected to remain high throughout the year and into 2023. In the Middle East and North Africa, spillovers from tighter global financial conditions, reduced tourism, and secondary demand spillovers (for example, from Europe) will also hold back growth, especially for oil importers.

Overall, GDP in the Middle East and Central Asia is expected to grow by 4.6 percent in 2022.

Sub-Saharan & East African Economic Highlights

In sub-Saharan Africa, food prices are the most important channel of transmission, although in slightly different ways. Higher food prices will hurt consumers’ purchasing power—particularly among low-income households—and weigh on domestic demand. Social and political turmoil, most notably in West Africa, also weigh on the outlook. The increase in oil prices has however lifted growth prospects for the region’s oil exporters, such as Nigeria. Overall, growth in sub-Saharan Africa is projected at 3.8 percent in 2022.

Asia: As noted, the combination of more transmissible variants and the strict zero-COVID strategy in China has led to repeated mobility restrictions and localized lockdowns that, together with an anemic recovery in urban employment, have weighed on private consumption. Recent lockdowns in key manufacturing and trading hubs such as Shenzhen and Shanghai will likely compound supply disruptions elsewhere in the region and beyond. Notable downgrades to the 2022 forecast include Japan (0.9 percentage point) and India (0.8 percentage point), reflecting in part weaker domestic demand—as higher oil prices are expected to weigh on private consumption and investment—and a drag from lower net exports.

United States and Canada: Economic links between Russia and the United States and Canada are limited. The additional 0.3 percentage point forecast markdown for 2022 in the current round reflects faster withdrawal of monetary support than in the previous projection—as policy tightens to rein in inflation—and the impact of lower growth in trading partners because of disruptions resulting from the war. The forecast for Canada is marked down 0.2 percentage point, reflecting the withdrawal of policy support and weaker external demand from the United States.

Latin America and the Caribbean: With fewer direct connections to Europe, the region is also expected to be more affected by inflation and policy tightening. The downgrades to the forecasts for the United States and China also weigh on the outlook for trading partners in the region. Overall growth for the region is expected to moderate to 2.5 percent during 2022–23.

Key Global Risks.

A worsening war. Although a fast resolution of the war in Ukraine would lift confidence, ease pressure on commodity markets, and reduce supply bottlenecks, it is more likely that growth could slow further and inflation turn out higher than expected.

Increased social tensions: The war in Ukraine has increased the probability of wider social tensions through commodity hoarding, export controls, and domestic restrictions—with further knock-on effects on supply disruptions, prices, and social unrest. The second is the longer-term impact of the humanitarian crisis. In the longer term, large refugee inflows may exacerbate pre-existing social tensions and fuel unrest.

A resurgence of the pandemic: Although conditions are improving, the pandemic may yet take another turn for the worse—as seen, for example, with recent rising caseloads in China and elsewhere in the Asia-Pacific region. A worsening slowdown in China: A prolonged downturn in China is another immediate risk that could expose structural weaknesses such as high local government liabilities, property developer leverage, household debt, and a fragile banking system.

Inflation: Inflation expectations have so far risen substantially in only a few emerging market and developing economies. Yet with already high inflation and rising energy and food prices, higher inflation expectations could become more widespread and, in turn, lead to further increases in prices.

Higher interest rates leading to widespread debt distress: The pandemic led to record levels of public debt around the world. As interest rates rise, this will strain public budgets with tough choices around fiscal consolidation over the medium term, as pressures for social and, in some cases, defense spending may remain high.

The ongoing climate emergency: Despite some steps on the path toward a green transition, global emissions are—on current trends—very likely to overshoot the Paris Agreement temperature goals by the end of the century and lead to catastrophic climate change (with low-likelihood outcomes such as the ice sheet collapse, abrupt ocean circulation changes, and some extreme events and warming that cannot be ruled out). Indeed, the effects of warming are already starting to show: droughts, forest fires, floods, and major hurricanes have become more frequent and more severe.

Post -pandemic risk mitigations for African economies.

To engender resilient economies in Africa, governments need to:

• Speed up COVID-19 vaccination rollout.
• Increase investments in critical healthcare systems.
• Promote inclusive growth to address increased poverty and inequality
• Coordinate monetary and fiscal policy
• Reduce dependence on any single supplier of food.
• Boost local cereal production in Africa to mitigate global supply risks.
• Authorities need to ensure that their fiscal frameworks remain credible in the face of climate-related risks.

These risks can create large borrowing needs and should be integrated into authorities’ fiscal and debt management strategies, debt sustainability analysis and medium-term budget frameworks.

KENYA ECONOMIC OUTLOOK

Kenya’s economy has rebounded strongly and is projected to grow 5.7 percent in 2022. Inflation moved above the Central Bank of Kenya’s (CBK) official target band of 2.5 percent to 7.5 percent in June and is expected to peak this year before easing back within the band in early 2023. Downside risks predominate in the near-term. Uncertainties stem from the war in Ukraine, continuing drought in the semi-arid regions, unsettled global financial market conditions and the political calendar. But Kenya’s medium-term outlook remains favorable.

The very strong tax performance seen in fiscal year 2021/22 has created fiscal space to temporarily cushion part of the impact of rising international fuel prices on households and businesses while still meeting program targets.

Monetary Policy Statement.

The CBK’s monetary policy is designed to support the Government’s objectives with respect to growth.

At its 30th May 2022 meeting, the Monetary Policy Committee (MPC) of the Central Bank of Kenya delivered the first rate hike since July 2015 and increased its Central Bank Rate by to 7.50%.
The decision was driven by the ongoing upward trend of inflation. The war in Ukraine has trickled down to the Kenyan economy through higher prices for wheat, fuel, fertilizer and food oils, which have bolstered food and fuel prices and fueled inflation in turn. Given upside risks to the inflation outlook, the Bank decided that a hike would help further anchor inflation expectations.
The next meeting is scheduled to take place in July.

The achievement and maintenance of a low and stable inflation rate coupled with adequate liquidity in the market, facilitates higher levels of domestic savings and private investment. This leads to improved economic growth, higher real incomes and increased employment opportunities.

Kenya Bank Lending Rate

In Kenya, the bank lending rate is the upper rate of interest charged on unsecured loans by commercial banks to private individuals and companies.

Bank Lending Rate in Kenya increased to 12.20 percent in April from 12.15 percent in March of 2022. source: IMF

Deposit Interest Rate in Kenya

The Deposit Interest Rate is the average rate paid by commercial banks to individuals or corporations on deposits.

Kenya’s GDP growth at 5.2% in 2022

Kenya’s real GDP is projected to grow by 5.5% in 2022 and 5.2% on average in 2023–24, a robust pace but lower than the 7.5% rate projected in 2021.

Kenya’s economy grew 6.8 per cent in the first quarter of the year driven largely by the recovery of key sectors from the Covid-19 pandemic and sound macroeconomic environment. However, price hike of various food basket items drove inflation to a five-year high of 7.9 per cent in June, up from 7.1 per cent in May.

The cost of living has been rising on a monthly basis since February, hitting 7.1 per cent in May. This is partly attributed to Ukraine – Russia crisis which has stoked energy and food prices after choking the global supply chain.

In the first three months of the year, the Kenyan Shilling ceded ground against US Dollar, Pound Sterling and South African Rand by 3.7 per cent, 1.0 per cent and 3.2 per cent, respectively, in the first quarter of 2022, KNBS data shows.

The three surveys conducted ahead of the MPC meeting—Private Sector Market Perceptions Survey, CEOs Survey, and the Survey of Hotels—revealed continued optimism about business activity and economic growth prospects for 2022. Employment levels in hotels are yet to reach pre-pandemic levels. Exports of goods have remained strong, growing by 11.1 percent in the 12 months to April 2022 compared to a similar period in 2021. In particular, receipts from tea and manufactured goods exports increased. Receipts from horticulture exports declined. Imports of goods mainly reflecting increased imports of oil and intermediate goods. Tourism and transportation receipts have increased as international travel continues to improve.

The CBK foreign exchange reserves, which currently stand at USD8,179 million (4.86 months of import cover), continue to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market.

The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.1 percent in April 2022, compared to 14.0 percent in February. NPLs increases were noted in the building and construction, manufacturing, trade and transport and communication sectors. Growth in private sector credit increased to 11.5 percent in April 2022, from 9.1 percent in February. Strong credit growth was observed in the following sectors: transport and communication (28.9 percent), manufacturing (12.0 percent), trade (10.7 percent), consumer durables (16.1 percent), and business services (12.2 percent). The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities.

Mobile Subscriptions.

Mobile Money Services has been a driving force for financial inclusion for Kenya’s underserved and most vulnerable groups, particularly women. During the reference period, mobile money subscriptions grew from 35.2 million recorded as at the end of December 2021 to 36.4 million subscriptions by end of March 2022 hence translating to a penetration rate of 73.8%.

As at 31st March 2022, the number of active1 mobile (SIM) subscriptions stood at 64.9 million from 65.1 million subscriptions recorded by the end of 31st December 2021, and representing a mobile (SIM) penetration rate of 131.4%.

Diaspora Remittances

According to the Central Bank of Kenya (CBK), the US remains the largest source of remittances in Kenya, accounting for 59 per cent in the period.

“The strong remittances inflows continue to support the current account and the stability of the exchange rate,” said CBK in its weekly bulletin.

Respondents in the Remittances Survey addressed key challenges: high cost of remittances; hidden fees and charges such as indirect currency conversion fees; unfavorable exchange rates; limited interoperability; and slow interbank transfer processes.

Going forward, there exists opportunity for business entities in the remittance market if they can address key challenges through partnerships and better technological innovation.

Kenya Inflation Chart

Note: Month-on-month and year-on-year changes of consumer price index in %. Source: KNBS

KEY POLICY RESPONSES IN Q2.

The FY2022/23 National Budget was released earlier than is traditional, i.e. on 7^th April 2022, in consideration of the government’s preparations for the upcoming General Elections in August 2022.

To finance the Budget, the Government expects to raise ordinary revenue of KES 2.14 Trillion. To this end, it has proposed several tax measures expected to generate an additional KES 50.4 Billion to the exchequer for the budget 2022/23. The increases in excise duty for certain products will mean higher prices for consumers. Another measure is the requirement for taxpayers to deposit 50% of disputed taxes in a special account at the Central Bank of Kenya before appealing a decision ruled in favour of the Commissioner at the Tax Appeals Tribunal.

VAT and Excise duty exemptions for certain sectors notably local motor vehicle and pharmaceutical manufacturers sector will be beneficial for these sectors. Microfinance institutions will also be spared the restriction on interest deduction.

Government expenditure as a % of GDP is projected to decline from 25.0% in 2021/2023 to 23.9% in 2022/2023 owing to efforts by the Government to rationalise recurrent expenditure through implementation of cost-cutting measures including parastatal reforms and alignment of resources to programmes particularly focused on the Big Four Agenda and the Economic Recovery Strategy. Development expenditure as a % of total expenditure in 2022/2023 is expected to increase to 36% primarily driven by enactment of the law requiring that development expenditure constitutes a minimum of 30% of total expenditure and restriction of the use of borrowings for development expenditure.

Top 3 winners in the 2022/23 budgetary allocation.

The education sector has been allocated 16% of the budget.

Energy, Infrastructure and ICT The Energy, Infrastructure and ICT sector has been allocated KES 368.3bn Public administration and International Relations has been allocated KES 347.0bn to strengthen administration of public services.

KENYA FINANCIAL MARKET

For Qtr 2 and going forward there are considerable downside risks in the short term to medium term. According to McKinsey’s March 2022 Economic conditions outlook, geopolitical instability is one of top risks to global and domestic economies. An increase in fossil fuel prices is bound to impact Kenyans through a corresponding increase in cost of living, occasioned by surges in transport and production costs.

Kenya is entering into an election season culminating in the August 2022 General Elections. Election periods in Kenya are typically characterized by intense political campaigns often leading to high political temperatures that cause uncertainty. These uncertainties may result to a slump in economic activity and investments as investors conserve financial reserves awaiting the outcome of the elections and resumption of ‘business as usual’.

Climate change is a major concern to the extent that it induces uncertainty in weather patterns, influencing regional crop growing conditions and pest incidence. Adverse weather conditions are expected to potentially reduce the annual crop yields and as such exposing the economy to negative shocks which will certainly impact on economic growth and by extension tax revenues. Increased expenditure pressures. The Kenyan government is experiencing financial stress stemming from record-high debt levels and overall growth in public expenditure.

Key Themes reported in Q2.

GOK bonds offered the largest returns over the first half of 2022.

According to data from Quarterly Economic Review 2022 published by the Central Bank of Kenya (CBK), the government reopened two bonds with effective tenures of 5.8 years and 11.3 years, respectively, in a bid to raise Ksh40 billion for budgetary support.

The two bonds are currently trading in the secondary market at yields of 12.6% and 13.7% – the highest potential return on investment during the period under review.

Investors also opted to take advantage of the returns from fixed deposit accounts, with the CBK revealing that the average of 6.58% interest was second only to the aforementioned bonds.

It is important to note that small savers’ accounts didn’t have this high return as their rates still averaged in and around 2.5%. It was the cash-rich companies and individuals who reaped huge returns

This is backed by the fact that fixed deposits in banks rose by Ksh33.6 billion or 2.1% to Ksh1.6 trillion during the first quarter of 2022, a much faster growth rate compared to the corresponding period last year when they were up 1.9%.

The deposit base also increased by 0.6% to Ksh4.4667 trillion in the first quarter of 2022, from Ksh4.441.9 trillion in the fourth quarter of 2021.

Banking highlights and Outlook.

The Central Bank of Kenya (CBK) enacted the Digital Credit provider’s regulations to regulate digital lenders, granting the bank the authority to license and oversee previously unregulated digital credit providers.

Centum Investment Company PLC, announced that it had entered into a binding agreement to sell its 83.4% shareholding in Sidian Bank to Access Bank PLC.

Equity Group and the International Finance Corporation (IFC) signed a partnership agreement in support of the sustainable development of Africa strategic plan by the Group which saw IFC and its partners commit USD 165.0 million (KSH 19.2 billion) towards Equity’s `Africa Recovery and Resilience Plan.

Britam Holdings, and Britam Life Assurance, jointly announced that the two firms were finalizing on an agreement to sell their stakes in Equity Group Holdings to the International Finance Corporation (IFC) and the IFC Financial Institutions Growth (FIG) Fund.

The banking sector continued to recover as evidenced by the increase in their profitability, with the Core Earnings Per Share (EPS) growing by 37.9%. The increase in EPS is mainly attributable to the reduced Loan Loss Provisions levels by the sector. There is also growth in Non-Funded Income (NFI). Non-Funded Income is income that banks earn from activities other than their core intermediation business (taking deposits and making loans) or from their investments and is derived primarily from fees including deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fee.

This type of income is often referred to as “fee income” since fees constitute the majority of non-interest income. Upcoming financial institutions can emulate the industry practice by first finalizing on the categorization by segmenting their products offering for more value add to grow NFI.

Uncertainty surrounding the August 2022 elections coupled with the resurgence of COVID-19 infections, will see banks continue over provisioning in the medium term, albeit lower than in 2020 at the onset of the Covid pandemic.

Banks’ Operational strategies going forward.

Based on the current operating environment, the most likely scenarios for banks will be:

• Growth in Interest income.
• Revenue Diversification which can be achieved through increased adoption of digital channels, which present an avenue for an increase in fees on transactions.
• Continued Loan-loss Provisioning.
• Cost Rationalization. However, some of the banks such as NCBA and DTB-K have announced plans to open more branches with an aim of increasing their physical presence.
• Regional Expansion and Further Consolidation.
• Integration of Climate-Related Risk Management as per the CBK Guidance on Climate-Related Risk Management.

Recommendations going forward

We foresee rising cost of living leading to consumers’ disposable incomes declining. This could further fuel social unrest risks.

Expected interest-rate hikes to counter inflation will adversely affect the cost of credit and enterprises may be forced to dip into cash reserves or convert long term deposits to short term deposits.

Greater use of the digital channels is expected to lead to an opportunity for personalized communication with customers as well opportunities to grow revenues away from core business.

For financial institutions and service industry, integrating core processing software with third party systems and channels will allow a more customer-centric business approach and allow them to innovate on more personalised products.

For FinTechs, despite the decline in remittance inflows from traditional source locations such as USA, opportunities exist for send- to- account remittances with the enhancement of the mobile and internet banking platform. This presents an attractive, secure and confidential and cheaper opportunity to our customers as they no longer have to involve relatives to receive on their behalf. The downside to this is the weakening shilling against major currencies.

Government to Customer (G2C) as well as Customer to Government (C2G) transactions are expected to become more efficient with little or no human intervention as there is a focus on digitisation of government processes in view of IMF policy recommendations for better management of resources and reduction in corruption. FinTechs are expected to play an important the introduction of easier integration with government processes for citizen to government (C2B) payments.

We see the government coming up with more targeted programs to support vulnerable households especially in light of the withdrawal of the ongoing review of the fuel pricing mechanism [fuel subsidy] as recommended by the IMF. This presents an opportunity to the non-governmental sector and civil groups to participate more in the social support programmes such as Inua Jamii and the hunger support programmes.

Prepared by

research@tumainiinstitute.ac.ke

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