Kenya’s banking sector is considered to be among the strongest in the east Africa region, and several of its lenders have established a multinational presence in the region and beyond. But a proliferation of small banks, two of which have collapsed in recent months, has led to considerable hand-wringing over the need to consolidate the country's fragmented market.
There are 41 banks operating in Kenya, 13 of them foreign owned. But six of these account for 50% of total market share, while a further 16 banks control 42% of the market, leaving 12 banks with just an 8% share between them.
“There’s been an obvious sense that consolidation is required in Kenya’s banking sector for quite a while,” says Aly-Khan Satchu, CEO of Nairobi-based investment advisory Rich Management. “The central bank governor is on record as saying that the sector requires some consolidation.”
Government pressure
In recent months the government has begun to apply pressure for exactly that reason. In the 2015 budget, covering the period from July 1, 2015 to June 30, 2016, the finance ministry proposed to increase banks’ minimum core capital requirement, and in November, the Central Bank of Kenya (CBK) announced the suspension of licensing of new commercial banks with immediate effect. “Saying no to new licences is a way of calling for consolidation, because the door has been left open for interested parties to take on existing licences,” says Mr Satchu.
But in August the proposed increase in capital requirements, from Ks1bn ($10m) to Ks5bn, was quashed by the Kenyan parliament. Lawmakers claimed that the move would stifle growth in the banking sector. Even the central bank decided not to back the measure. The bank’s governor, Patrick Njoroge, took over the role at the beginning of June 2015, just days before the treasury secretary, Henry Rotich, delivered his budget speech. Mr Rotich argued that an increase in core capital requirements would promote a sustainable banking sector comprising strong, well-capitalised institutions able to invest in large infrastructure projects and withstand financial shocks.
A few weeks after his appointment, Mr Njoroge made his own position clear, warning parliament that the proposed measure would squeeze out smaller lenders offering niche products services to Kenyan citizens, and that there was no evidence that consolidation would drive down commercial lending rates.
Feeling the failure
Pressure for consolidation has mounted since the failure of two small banking institutions towards the end of 2015. Dubai Bank was put in receivership in August for liquidity and capital deficiencies, and within a matter of days the bank’s statutory manager, Kenya Deposit Insurance Co-operation, recommended its liquidation. A ruling by the High Court to halt the liquidation has been challenged by the CBK.
Imperial Bank was placed under statutory management in October, after the bank suffered losses of Ks35bn due to alleged fraud over a 13-year period. Consolidated Bank has also been accused of being in breach of minimum capital requirements. The lender advanced more than one-quarter of its core capital to cigarette manufacturer Mastermind Tobacco, according to the findings of the government’s Public Investments Committee.
The collapse of Dubai Bank and Imperial Bank led some clients of smaller banks to shift their deposits to the bigger institutions. Kenya's banks themselves are striving to meet existing capital adequacy requirements. Prime Bank announced on February 1 that it had raised Ks1.02bn from investors to shore up its capital base in advance of a planned expansion.
Capital struggle
If capital requirements are increased, many small banks will struggle to make the grade. About half of the country’s 41 banks are currently above the Ks5bn threshold, while a number of others are close enough that they could probably raise the additional capital within the three-year timeframe envisaged by the proposed legislation. But there would inevitably be casualties.
“If they raised the capital requirement to Ks5bn obviously there would be some banks that would be compelled to be acquired by larger ones,” says Kefa Muga, a senior economist at the African Trade Insurance Agency in Nairobi. “Some lack the capacity to increase their capitalisation to that degree.” Jared Osoro, director of research and policy at the Kenya Bankers Association, agrees that such an increase would “force some mergers or acquisitions”. Between 30 and 35 banks would survive such a measure, according to banking sources speaking to The Banker.
It remains to be seen whether the government will continue to push for an increase in capital requirements, and if it does whether it can secure parliamentary assent. Strong opposition to the move is likely to persist due to the influence of those invested in the status quo. Despite their weaknesses, there is also a recognition that smaller banks have a role to play in the sector.
“There are a number of banks serving niche markets,” says Mr Osoro. “There are those with purely corporate customers who because of their deep understanding of their customers can provide higher quality services. And there are those focusing on small and medium-sized enterprises, which make up a much larger part of the market in Kenya than in Nigeria and South Africa.”
The smaller players “understand the risks at a finer granularity than banks that have their headquarters overseas and are often making decisions from the point of view of their Africa business”, says Mr Satchu.
Mr Njoroge argues that the collapse of Imperial Bank and Dubai Bank does not mean that all small banks are mismanaged. “There’s some truth in what the central bank has said,” says Mr Muga. “It’s not a systemic problem. The banks with problems are finding themselves in those situations because of individuals [at management level].”
Better supervision?
What is clear, however, is that the system needs to do better when it comes to identifying when such problems arise. “The central bank is a very effective regulator, but it is just realising that it needs to do more monitoring of the smaller banks to ensure they are effectively managed,” says Mr Muga.
Mr Njoroge has made the improved supervision of the banking sector a central pillar of his programme at the central bank. If implemented, his plans would offer an alternative route to consolidation. “If the idea behind increasing minimum capital requirements is to enhance stability in the banking sector, that can be done by other means, such as beefing up prudential guidelines and ensuring capital adequacy ratios are adhered to,” says Mr Osoro.
Even without an increase in capital requirements, many of Kenya’s smaller banks would struggle to cope with the demands of an overhaul in banking standards. Satisfying requirements for improved management, transparency and due diligence may be an insurmountable challenge for some smaller players. “Banks with a very small loan book will struggle to make the required investments in compliance,” says Mr Satchu.
Smaller government
In parallel to these developments, the government is looking to reduce its stake in the banking sector, and to merge some of those banks in which it holds shares. National Bank, Consolidated Bank and Development Bank are all candidates for a government divestment, and possibly for a merger. “National Bank is already listed on the Nairobi Stock Exchange, so the government can divest by selling shares on the market,” says Mr Osoro. “The other two can be merged.”
However, international interest in Kenya’s weaker banks cannot be taken for granted. With the exception of the recent acquisition of a 70% stake in Fina Bank by Nigeria’s Guaranty Trust Bank, there has been scant merger and acquisition activity in the Kenyan banking market. The only move currently on the table is the proposed buy-out of Giro Bank by I&M Holdings, which was made public in September and is awaiting approval from the central bank.
In future there is likely to be consolidation in Kenya’s banking sector, but at a slow pace. “There’s definitely a desire to push in this direction, but the question is how to make it happen,” says Mr Satchu. “It’s not going to be a linear process, there’s going to be some zigs and zags. But at least the course is set.”
