Despite overall stability in the financial system, the Central Bank has identified risks and vulnerabilities that could impact the banking sector, particularly concerning levels of non-performing loans (NPLs), posing a significant financial stability risk.
While the aggregate capital adequacy ratios remain robust and comfortably exceed minimum thresholds, the Central Bank notes that asset quality remains a concern, with substantial variations observed across institutions. Specifically, three banks have recorded NPLs significantly exceeding the maximum threshold, with two of these banks being local entities.
Of particular concern are the Commerce & Finance and Construction sectors, which are deemed vulnerable to NPLs, indicating potential challenges in loan repayment and asset quality within these industries.
Furthermore, the regulator highlights a trend where commercial banks are not sufficiently extending credit to the private sector. This reluctance is partly attributed to the crowding-out effect of heavy investment in government securities. Consequently, lending is concentrated in a few sectors and large borrowers, limiting the diversification of credit portfolios.
Additionally, banks are reported to heavily rely on customer deposits to finance investments in government securities. This preference for government securities over private sector lending could expose banks to earnings volatility in the event of interest rate fluctuations or a reduction in government borrowing from the securities market. Moreover, this practice may lead to liquidity challenges for banks.
Another emerging threat identified by the Central Bank is the risk of cyber security breaches as the banking sector transitions towards technology-driven banking services. With an increasing number of fraud and cybercrime cases reported in the industry, there is a growing need for robust cybersecurity measures to safeguard against potential threats to financial institutions and their customers.
In light of these concerns, the Central Bank emphasizes the importance of proactive risk management strategies and regulatory oversight to mitigate potential risks to financial stability. Addressing these challenges will require concerted efforts from both regulatory authorities and banking institutions to ensure the resilience and integrity of the banking sector amidst evolving market dynamics. ZIJ/27/5/2024