Kenyan lender Equity Bank has been listed among the African financial institutions that earned their shareholders the highest returns last year. London-based Financial Times says in its annual ranking of global banks that Equity profits were 48 per cent of its capital, indicating that an investor who put his money in the lender at the beginning of last year will have recouped his investment, if it returns a similar profit this year.

High level profitability is one of the parameters that enabled Equity to clinch fourth position in the list of banks that earned shareholders the highest returns, according to the FT’s annual The Banker report. Two other Kenyan banks, KCB and Co-operative are among Africa’s top 10 lenders with the highest returns to shareholders.

KCB which is Kenya’s biggest bank by capitalisation is ranked sixth while Co-op Bank is ranked seventh, underlining the sector’s attractiveness to investors and the constant focus on its profitability by the public which feels burdened by the high cost of credit.

Bankers, however, defended the returns, arguing that other surveys have shown returns to shareholders by Kenyan banks are comparable with their peers in the continent.

“A survey by a group of institutions, including Deloitte found that we are comparable with the rest of Africa. Globally, the returns are lower in developed markets because risks are lower, but in developing economies the returns have to be higher commensurate with the risk,” said Kenya Bankers Association chief executive Habil Olaka.

Kenyan banks cite the high risk they take by offering unsecured personal loans and funding small and medium-sized businesses that do not have assets to offer as security as the key driver of interest rates.  But the FT report shows the three Kenyan banks are outliers clustered among the top players in a group of more than 30 African banks that made it to the Top 1,000 global list.

Only CBE of Ethiopia with a return of 90 per cent on capital, Egypt’s Banque du Caire and National Bank of Egypt were ahead of Kenya’s Equity. Ethiopian financial industry is still closed to international investors while Egypt has recently become unstable, facing the threat of terrorism.

Kenya’s Central Bank in a recent report put the banking sector’s return on equity at 26.7 per cent based on the industry’s total profit before tax of Sh141 billion. That rate of return means that investors in the sector could recoup their investment in four years. Helios Investment, which has started reaping its eight-year investment in Equity Bank, has so far earned an estimated Sh27.5 billion from the sale of half its holding in the bank.

The company still owns 9.7 per cent of the bank valued at an estimated Sh11 billion which is equivalent to the initial investment it made in the lender.

Equity, KCB and Co-op Bank are the only Kenyan lenders that made it to the list of the world’s largest 1,000 based on the strength of shareholders capital. Co-op Bank returned to the prestigious list at position 981 after missing out last year. KCB was the best ranked local bank at position 833 up 13 places from last year while Equity is the world’s 916th largest bank, up from 990 last year.

Equity has also been ranked 10th among the fastest growing lenders on the continent, its shareholders capital having grown 19.5 per cent last year.

This is the third year in a row that Kenyan banks are ranking top in the list of lenders with the highest returns, but analysts said introduction of a common base rate by Central Bank of Kenya is likely to spoil the party.

“In the past the returns have been coming from high interest margins, but going from the looming increase of core capital and introduction of Kenya Bankers Reference Rate [KBRR] I don’t see it staying there. It will come down to global and continental averages,” said Vimal Parmar, who heads research at Burbidge Capital.

Kenyan banks are required to gradually raise their core capital to Sh5 billion by 2018. Though this is not likely to affect the top banks, it will cut back the amount of cash available to them for trading.