How Treasury Single Account could hit banks
Huge deposits could flow from the banking system to central banks
A source from Kenya’s National Treasury said that internal consultations are ongoing on implementation
East African banks are bracing themselves for yet another period of reduced earnings as governments move to set up treasury single accounts to mop up public funds from commercial banks.
The policy shift, which has been approved by the East African Community partner states, is expected to reduce cashflow within the banking sector and subsequently stifle economic activity by reducing lending to the productive sectors of the economy.
The regional bloc has resolved that each partner state implements a Treasury Single Account (TSA) to ensure complete oversight over the government’s cash flows and to reduce the cost of keeping public money in several commercial banks.
Tanzania’s Finance Minister Phillip Mpango said the move would reduce the number of government accounts operated in commercial banks and the Central Bank and reduce costs related to services offered by commercial banks to the government.
The implementation of this policy comes as regional banks continue reporting mixed results attributed to a number of factors, including high levels of non-performing loans, high operating costs, slowdown in economic activity and controlled interest rates in some countries such as Kenya. The regional banks that have released their half-year financial performance for this year are Bank of Kigali, KCB, Equity Bank, Co-operative Bank of Kenya, Barclays Bank Kenya and Stanbic Bank Uganda.
In Kenya, KCB Group and Equity Bank announced profit after tax of $121 million and $110 million respectively during the six months o June 30. Co-operative Bank of Kenya also recorded a 7.6 per cent jump in its after tax profits to $99.8 million driven by increased investment in government securities. Barclays Bank of Kenya’s net earnings grew six per cent to Ksh3.8 billion ($37.2 million) while that of Stanbic Bank Uganda remained flat at Ush96 billion ($25.8 million).
The Bank of Kigali made a net profit of Rwf13.4 billion ($15.4 million) during the six months to June 30 compared with Rwf16.7 billion ($18.9 million) in the same period last year.
While there is increased optimism within the banking sector of a probable turnaround in performance during the year, rating agency Moody’s Investor Service says the lenders’ increased exposure to government deposits could further dent their earnings. In addition, cashflow stress within the sector could be heightened by the increasing mismatch between short term deposits and long term loans, as banks are unable to use short-term deposits to lend to long-term borrowers.
“Government deposits could drop if the governments consolidate funding flows from ministries, agencies and departments into a single treasury account,” says Moody’s, which advises banks to diversify their sources of funding away from government deposits.
“Deposit growth is supported by rising banking penetration, increasing use of mobile and agency banking, growing household wealth and solid economic growth. Deposits are inexpensive and diversified, but a sizeable mismatch between short-term deposits and longer-term loans heightens the risk of liquidity stress,” says Moody’s.
In Kenya, government deposits account for around 10 per cent or $2.9 billion of the total banking deposits, which stood at $29 billion in 2017. This proportion of government deposits is expected to be removed from the banking industry if the government goes ahead with its single account plan.
Analysts at Britam Asset Managers say a huge proportion of deposits will flow from the banking system to the Central Bank, leading to tighter liquidity in the banking system. In Tanzania, the government issued a directive in January 2017 requiring all ministries, public corporations and local authorities to transfer their funds from commercial banks to the Bank of Tanzania (BOT). This led to an outflow of deposits from commercial banks, estimated at Tsh600 billion ($262 million). This directive has been cited as one of the reasons for the collapse of Bank M.
Economic researchers at the Oxford Business Group, a global research and consultancy firm, say contraction of the total deposit base for the banking industry has led to concerns regarding sector liquidity, and has limited the ability of some institutions to issue loans.
A source at Kenya’s National Treasury told The Eastafrican that internal consultations are ongoing on how to implement the Treasury Single Account proposal.
“We are still consulting. I know this account is long overdue. There were few hitches here and there because of some changes in policy that introduced other electronic payment solutions such as the Integrated Financial Management Information System (IFMIS). But we are on course,” said the source.
The IFMIS was launched in August 2014 to monitor how ministries, departments and agencies utilise funds on a real-time basis in a bid to improve budget implementation.
It is an electronic system that automated public procurement processes to seal the loopholesm in the manual system through which state officers stole public funds.
However the system does not seem to have stopped looting of public funds going by the eported financial scandals in ministries and government departments.
In Uganda, the government has been undertaking public financial management reforms, of which IFMIS and Treasury Single Account are major components, to strengthen financial and cash management systems.
According to the International Monetary Fund Uganda has made good progress on TSA implementation over the past three years.
For instance, the country’s Accountant General’s Office has its core TSA arrangements comprising a separate Uganda Consolidated Fund, TSA holding accounts and TSA sub-accounts for accounting entities. The sub-accounts are funded when payments are ready to be made and unspent balances are swept back to the TSA holding account on a daily basis.