How to choose a Bank

Abstract

Following the bank closures and financial institution warnings in 2015, Wafula became highly concerned with the safety of his deposits in Kenyan entities. In response, he disbursed his funds into smaller deposits held at multiple institutions. However, usage of a multitude banks proved inconvenient for him. So after reading the value of small banks article in Business Talk last week, Wafula determined to investigate the health of various banks so as to ascertain which bank to put the bulk of his deposits.

The choice of a financial institution revolves around a customer’s unique needs. Besides the financial security of the bank, clients must also decide on the level of convenience required, fees desired, and product sophistication.

The safety of one’s deposits often features most prominently on consumers’ minds, but is often not understood. Start off by investigating whether the financial institution carries an external rating from Standard & Poor’s, Moody’s, and Fitch for commercial banks or Microfinanza or Planet Rating for microfinance banks. Despite the failings of ratings agencies in the global financial crisis of 2008, accountability to external ratings agencies should still provide you substantial levels of comfort regarding your savings. In microfinance, ratings agencies even conduct extensive onsite due diligence before issuing their opinions.

Also, check whether major equity or debt institutional investors from respectable entities partner with your bank, such as Helios Investment Partners, African Development Bank, among others. Microfinance bank customers should look for AfriCap, Soros Fund, Kiva Microfunds, or Oikocredit as an example. Check Microfinance Gateway for the strength of microfinance banks and funders in Kenya. Large external partners hold powerful sway to keep financial institutions accountable that numerous small investors and depositors cannot muster.

Additionally, seek data on a bank’s concentration of loans to major borrowers. If the majority of funds are lent out to a few borrowers like the industry saw in the past, contrary to Central Bank of Kenya requirements, then your deposits are at substantial risks.

Additionally, regulators in the United States came up with the CAMELS assessment. The acronym encompasses capital adequacy, asset quality, management, earnings profitability, liquidity and funding, and sensitivities to market risk. Most of the aspects feature ratios rather than absolute values as also utilised by the Central Bank of Kenya. The more risky an asset, then the higher the capital required in ratio requirements. You may quickly calculate capital adequacy, liquidity and funding, and market risk sensitivity ratios by looking at your bank’s financial statements and the formulas on Credit & Finance Risk Analysis. You need your bank to provide back your savings on demand and retain enough liquidity to do so.

An institution’s portfolio-at-risk represents the extent of repayments at the bank and is one of the snapshots for asset quality. When a loan exceeds 90 days without a full payment, then the bank must consider the entire outstanding loan balance outstanding as at complete risk of loss. Global international standards hold that portfolio-at-risk should comprise less than 5% of total loans outstanding while in Southeast Asia the acceptable figure exists as less than 2%, but here in Sub-Saharan Africa the desirable portfolio-at-risk should total less than 10%.

Under the management section, an argument in favor of selecting a larger bank often revolves around the competency of staff. The best and the brightest often desire to enter the banking sector after graduation and go into large commercial banks. However, often not discussed, is that later in their careers, seasoned professionals frequently desire the flexibility and creative freedom of working in a smaller financial institution and switch banks. When choosing a bank, strong correlations exist between the experiential diverse track record of its senior executives and the institution’s success.