The truth about banks’ investments in government
securities
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
24 November 2024
Are Kenyan banks
making too much profit? Is it right for them to invest most of their
money in government treasury bills and bonds (instead of lending to
their customers)? These questions always come up when banks publish
their quarterly financial statements.
The public concern
arises because many banks declare profits in the billions of shillings
and people tend to feel that these amounts are not justified. Indeed, I
was recently roped into such a conversation on the X Internet platform a
day after Absa Bank published it third quarter results showing a 20 per
cent growth in earnings.
The bank reported
that, in the nine months since January 2024, it’s profit after tax was
Sh13.8B which was a 20pc improvement on the Sh11.5B it had earned in a
similar period last year. Is Sh13.8B too much profit? Let’s find out.
To answer that
question, we must ask where this profit came from. That is, what was the
‘sales turnover’ of the bank. Banks make most of their money from
interest charged. In the case of Absa, the total interest income was
Sh48.6B. In addition, it made another Sh11.0B from commissions, fees,
foreign exchange sales etc. The total turnover was, therefore, Sh59.6B
So, the question
comes to this: is it OK for a business with a turnover of Sh60 to make a
profit of Sh14? (Forget about the billions for a moment!). What about
making Sh14,000 from a turnover of Sh60,000? I suspect that most people
wouldn’t call it abnormal. If that is so, why then do people think it is
unacceptable to make Sh14B from a turnover of Sh60B?
There also the claim
that banks make most of the profits from treasury bills and bonds. A
quick look at the financial statement reveals that out of the Sh48.6B
interest income, only Sh6.5B was from investments in government
securities. This represents just 13 per cent of the income.
Interest from loans
and advances to customers was Sh40.6B – over six times the amount earned
from government securities! Furthermore, the amount of money invested in
government securities was Sh96B and the total loaned to customers was
Sh311B. Again, we see that the popular claim that banks lend most of the
money (customer’s deposits) to the government instead of to customers is
simply not true. Of course, this is just one bank, but a similar trend
will be observed in all the others.
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