How Kenyan banks actually make money
Three income lines, one of which everybody forgets. Once you can read a Kenyan bank's results in those three parts, you can read any bank's results anywhere.
A bank looks complicated from the outside and is fairly simple from the inside. It makes money three ways. Every Kenyan bank's annual report is those three lines plus a very large amount of supporting detail.
1. Net interest income — the spread
The bank takes your deposit and pays you very little for it. It lends that money out and charges considerably more. The difference is the spread, and the income it produces is net interest income.
This is usually the biggest line, and in Kenya it is often two thirds or more of the total.
The metric to know is net interest margin (NIM): net interest income as a percentage of the assets earning it. It answers "how much does this bank make on each shilling it has lent out?"
2. Non-interest income — fees
Everything that is not lending. Account charges, transaction fees, FX conversion, trade finance, custody, bancassurance commissions.
In Kenya this line has a particular character: mobile money and digital transactions are a large and growing part of it. A bank plugged into the mobile rails earns a stream of small fees at very low marginal cost, which is a structurally lovely place to be.
Fee income is the line investors like most, because it does not depend on the rate cycle. When you read that a bank is "diversifying its income," this is the line they mean.
3. Trading and investment income
Banks hold large books of government securities. They earn the yield, and they book gains or losses when those securities move in price.
This is where Kenyan banking has a quirk worth knowing. Lending to the government via Treasury bills and bonds is low-risk, needs no branch network and no credit officer, and in Kenya has often paid well. A bank can have a decent year without lending much to a business at all.
That is comfortable for the bank and not obviously good for the economy — and it is exactly what people mean by crowding out, which is covered in why the government borrows from you.
The cost side, in two numbers
Cost-to-income ratio. Operating costs as a share of income. Lower is better. Branch networks are expensive; digital channels are the reason this number has been falling across the sector.
Cost of risk / non-performing loans (NPLs). Loans that are not being repaid. This is the one that kills banks. A bank can survive thin margins for years; it cannot survive a loan book going bad. When you read a Kenyan bank's results, find the NPL ratio and the provisioning before you look at the profit.
Reading a bank's results in four minutes
- Net interest income — up or down, and what did NIM do?
- Non-interest income — is the fee line growing faster than the interest line?
- NPL ratio and provisions — is the loan book getting better or worse?
- Cost-to-income — is the bank getting more efficient, or just bigger?
Four numbers. Every listed Kenyan bank publishes them, free, on its investor relations page. Pick one bank and do this once — it takes fifteen minutes the first time and four minutes forever after.
We show our work
- Individual bank annual reports and investor relations pages are the primary source and are free to download.
- Central Bank of Kenya, Bank Supervision Annual Report, for sector-wide NPL, capital and profitability data.
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Treasury bills and bonds, the yield curve, and crowding out — explained as one continuous story rather than three separate lecture topics.
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