Overall, a careful policy balancing between stemming inflation through tightening policy rates and maintaining accommodative monetary policy is needed for sustained economic recovery and financial stability, the Central Bank of Kenya noted.

Following the lifting of restrictions that allowed for the complete restoration of commercial activity in 2021, the Kenyan economy recovered from the COVID-19 pandemic. The central bank forecasts a 5.7% increase in growth for 2022.

After experiencing a 0.3% decline in 2020, the economy recovered to post 6.8% growth in 2021.

Effective implementation of monetary, fiscal, and financial policies, in addition to the relaxation of COVID-19 containment measures, not only played a stabilizing role but also created an atmosphere that was favorable for economic recovery.

After surviving the Omicron variation in the fourth quarter of 2021, a successful vaccine, and improved adherence to COVID-19 guidelines, recovery is still on track.

However, the research cautioned that some of the main domestic risks to development include the potential return or introduction of the COVID-19 virus mutation, poor credit uptake during the electioneering period, and drought shock to agriculture.

According to the paper, the Russia-Ukraine war has impacted energy and commodity prices, increased global inflation, and caused a faster-than-expected tightening of monetary policy.

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In addition, Muriuki told the media, “We are actively engaging our customers to support them through this period by re-aligning servicing of facilities, funding and transactional needs as the situation unfolds.”

The Central Bank of Kenya allowed banks to offer relief to customers who are affected by the pandemic. The move was made in mid- March this year. According to the apex bank’s data, the total loan restructured was at Sh2.9 trillion by the end of June from the total banking sector’s loan book of Sh679.6 billion in May. That said, personal and household loans reached Sh240 billion, which is equal to 30 percent of all loans in the sector, media reports said. :We have fortified our digital channels to support uninterrupted access to banking services by our customers. At least 90 per cent of services are away from counters,” Muriuki said.

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Absa Bank Kenya Managing Director Jeremy Awori, told the media, “We recognize that it is a hard time for our customers with a lot of businesses having scaled-down operations and others closing down. This has resulted in strained cash flows for some of our customers and we are working together with them through this loan relief program to reduce the burden on their monthly financial obligations.”

The bank’s loan relief programme covers various forms of credit including personal loans, mortgages, asset financing and business loans. “Coronavirus is not just a health crisis but also a major economic crisis which has hit our economy hard. We encourage customers who may be going through tough financial times to reach out to us so that we can jointly explore suitable relief options,” he said.

In May, the Central Bank of Kenya ordered to implement measures that will ease the impact of the pandemic on the people and economy at large. In April, the central bank said that players in the banking industry had restructured loans worth Sh273 billion.

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It is reported that members hold shares in addition to deposits held in the Sacco. Unaitas CEO Martin Muhoho, told the media, “he growth in performance is attributed to the confidence of its members in its governance and management structures and aggressive business development strategies we have put forth.”

The Sacco comprises more than 320,000 members in Kenya. It has issued a 7 percent dividend along with a 3 percent loyalty dividend for each share held by its members, media reports said. “The plan is to have the various delegates following the proceeding online but they will have an opportunity to fully participate despite them being apart from each other,” Muhoho added.

Prior to the pandemic, the meeting was scheduled in Nairobi. More recently, it was reported that the Sacco has dropped plans to become a commercial bank in Kenya. A few years ago, the institution had sought a commercial bank licence to operate in the country.

The Sacco had invested in processes and systems to become a commercial bank, but the Central Bank of Kenya’s efforts to freeze licensing of new banks has forced it to drop the idea.

The regulator said in a statement, “The Central Bank of Kenya has, with immediate effect, placed a moratorium on licensing of new commercial banks until further notice.” In 2015, the central bank put a moratorium on licensing new banks and it is yet to lift the restriction.

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Sub-Saharan Africa’s GDP is expected to shrink 1.6 percent this year. This is primarily because of the impact of the ongoing pandemic and the subsequent slowdown in the economy. It is imperative for banks to hold a certain amount of premium liquidity assets such as government securities. But countries such as Nigeria, Kenya, and Ghana have opposed lenders for not doing so.

It appears that Kenyan lenders are subject to the risk of reduced deposits. Recently, the International Monetary Fund (IMF) approved $1.23 billion of emergency funding for Kenya and Uganda, media reports said.

The IMF in a report said, “The impact of Covid-19 on the Kenyan economy will be severe. It will act through both global and domestic channels, and downside risks remain large. While the authorities have taken decisive action to respond to the pandemic’s health and economic impacts, the sudden shock has left Kenya with significant fiscal and external financing needs. Authorities have committed to resume their fiscal consolidation plans once the crisis abates to reduce debt vulnerabilities.”

The central bank has already adopted several measures to ensure sufficient liquidity is maintained in the financial sector. This way, the central bank will be able to support the Kenyan economy and the overall financial sector.

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The acquisition will strengthen Co-operative Bank’s asset base to more than Sh 462 billion. With that, it will be a close competitor to NCBA Bank. 

Co-operative Bank will be the latest to acquire small lenders in the country. The bank said in a statement, “The acquisition will strengthen both institutions leveraging on their respective well established domestic and regional corporate public sector, retail business and the 15 million-member co-operative movement.”

Its board of directors have a positive outlook for acquisition of  Jamii Bora Bank. It is reported that the deal would increase the number of acquisitions in the Kenyan banking sector. In the recent past, National Bank of Kenya was acquired by KCB Group. 

The Central Bank of Kenya was in favour of the acquisition stating that it will boost the country’s banking sector. However, the proposed acquisition is subject to regulatory approvals, including from the Capital Markets Authority. This is because Co-operative Bank is listed on the Nairobi Securities Exchange. 

Last year, Commercial Bank of Africa (CBA) had shown significant interest in acquiring Jamii Bora Bank, media reports said. 

Co-operative Bank was ranked four by market share among 39 banks. It had a market share of  9.63 percent put behind KCB Group, Equity Bank and NCBA Bank. It is one of Sub-Saharan Africa’s nine largest banks with an asset base of more than 450 billion.

The Central Bank of Kenya has been driving mergers and acquisitions in the country — a move beneficial to the economy. 

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Statistically, Kenya has one bank per million Kenyans, compared to 0.3 in South Africa and 0.1 in Nigeria, two of the largest banking systems in sub-Saharan Africa. According to a Moody’s Investors Services analysis report, around five top banks in Kenya controls about half of the assets in the system, as of 2018.

The question today is does Kenya need so many banks? What is the ideal number of banks in Kenya? Is more consolidation the way ahead for Kenyan banking and how do es the Kenyan banking sector ensure consolidation is in the interest of the consumer?

Mergers and acquisitions in the Kenya banking system

In the fourth quarter of 2018, NIC Bank and Commercial Bank of Africa (CBA), two of the largest banks in Kenya, announced that talks are in place for a potential merger. Earlier in September this year, the Central Bank of Kenya announced that it had approved the merger between the two banks.

In April 2019, KCB (Kenya Commercial Bank), the largest bank in East Africa by total assets, announced its intention to acquire all of the ordinary shares of the state-owned National Bank of Kenya (NBK).

Access Bank, which is Nigeria’s biggest bank, is acquiring a 93.57 percent stake in Kenya’s Transnational Bank in a bid to build a stronghold in the East African market. The bank recently received a nod from the Competition Authority of Kenya. This year, Mauritius-based SBM Holdings also bought assets from Chase Bank Kenya and the entire capital of Fidelity Commercial Bank.

To put things into perspective, the Kenyan banking sector has witnessed a total of seven acquisitions and five mergers in the last 10 years.

So what is driving the consolidation in Kenyan banking?

Mergers often lead to economies of scale which results in higher returns for shareholders. In Kenya, economies of scale is one of the major drivers for consolidation amongst the smaller banks.

The entry of international banks in the Kenyan banking sector is also driving consolidation in the sector. Many international banks continue to eye the local market and this adds to the reasons for the larger banks to consolidate their position with increasing competition. In Kenya, so far nine foreign banks have set up representative offices in the country. Some of them are HDFC Bank, JP Morgan Chase, FirstRand Bank and Bank of China.

The number is expected to increase as more and more foreign banks look to increase their regional presence in African economies such as Kenya and also increase their customer base. The entry of foreign banks with strong financial muscle makes it difficult for smaller local banks to compete as they often face tough funding conditions. In such situations, a merger or an acquisition by a bigger bank seems to be the most suitable option.

Also, around 80 percent of the profits made by the Kenyan banking sector go to the bigger banks. Smaller banks, on the other hand, find it difficult to sustain their existing market share. This also pushes many small banks in the path of a potential merger. Richard Njoroge, an assurance partner and a member of PricewaterhouseCoopers (PwC)’s specialist financial services group, told International Finance, “My view is that the smaller banks will struggle to survive in the long run in the current environment unless they operate in very niche markets.

The level of investment that they require to keep up with technology and to cope with ever-increasing regulatory compliance requirements will make it more difficult for small banks to cope.  We saw a deposit flight from the smaller banks to the larger banks after the collapse of three banks in Kenya, which has resulted in some of the smaller banks experiencing liquidity challenges. It will take time for the confidence crisis to wane. Smaller banks also tend to have a higher cost of funds as they have to pay more to attract depositors, making them less profitable.”

Regulators are also playing an important role when it comes to consolidation in the Kenyan banking sector. Supervising a large number of banks always proves to be an arduous task and requires significant resources. However, fewer banks enhance their capacity to rigorously monitor and improve their banking systems’ overall supervisory framework.

IFRS 9 likely to sustain consolidation

The introduction of IFRS 9, which is another global financial reporting standard, is likely to sustain the flow of consolidation in the Kenyan banking sector. IFRS 9 became effective in 2018.  The biggest impact of the standard for banks is the level of provisions on loans (and other financial assets) that banks are required to make.

According to Richard Njoroge, the standard requires provisions to be based on a forward-looking expected loss method, instead of the “incurred loss” method in the old standard.  The higher provisions will reduce the level of profits reported by banks and reduce their capital ratios.  The impact on profits was not that discernible in 2018 as banks were able to charge to reserves the initial adjustment on opening loan loss provisions. We expect the impact on profits reported to be more noticeable going forward.

The regulators in the region announced transition rules for banks to cushion them against the immediate impact of IFRS 9 on regulatory capital.  However, banks have had to re-assess their capital adequacy plans in light of IFRS 9, and for some, this may mean raising more capital in the coming years or cutting back on dividend payments.

IFRS 9 has triggered banks to revise their pricing strategy on loans, although the scope for this in Kenya was restricted by the interest rate capping rules. With the lifting of interest rate caps, banks will have more flexibility in pricing.  Banks are also being forced to invest in systems such as IFRS 9 requiring the use of complex models and collection, maintenance and analysis of greater volumes of data.  Sufficiency and quality of data has been a challenge for many banks in the region in implementing IFRS 9.

With regard to the possibility of banking system disruption as a result of consolidation in the Kenyan banking sector, Christos Theofilou, vice president and senior analyst at Moody’s Investors Services told International Finance that, “Kenya’s consolidation has been industry-led, unlike other systems where this was a consequence of systemic weakness and authorities may have taken a leading role. As such, there is a more limited disruption to the overall banking system.”

Why is consolidation necessary in Kenyan banking?

Many small banks in Kenya do not have the resources to compete with the bigger banks, to invest in infrastructure and keep up with technological advancements. As a result, they suffer from weak risk management capabilities. Also, they face tough funding conditions.

They incur higher funding costs and hold lower capital. Such banks face a greater risk of collapsing, which will be catastrophic for the banking sector such as Kenya’s. Hence, if such a weaker bank is acquired by a bigger bank, it gets access to its infrastructure, expertise, technology and also financial muscle. In other words, consolidation brings stability to the banking sector.

According to Moody’s, consolidation increases banks’ economies of scale and improves income stability due to geographical and product diversification. It also reduces the number of very small, fundamentally weak banks within the banking sector, improving its overall credit profile.

Christos Theofilou, vice president and senior analyst, at Moody’s Investors Services told International Finance that, “Consolidation leads to a smaller number of stronger banks in Kenya, a credit positive for the country’s financial stability.

Kenya’s banking sector is overbanked with close to 40 commercial banks. Smaller banks often face tougher funding conditions, hold lower capital, and have less efficient operations. Tighter supervision, higher global regulatory requirements and the need to invest in new innovative infrastructure and digital technologies are additional challenges. Accordingly, we expect continued merger and acquisition activity as banks seek synergies, efficiencies, and economies of scale.”

Consolidation also lowers the level of systemic risks in a banking system. It improves regulatory oversight by reducing the burden of monitoring a large number of very small, fundamentally weak banks.

Many would argue whether the consolidation would guarantee that the Kenyan banking sector will be in a strong position in the next five to 10 years? When International Finance asked the question to Richard Njoroge, he said, “To be successful in the future, banks will have to embrace rapidly evolving technology; respond proactively to changing customer needs and deal with more demanding compliance requirements.  To achieve this will require significant investments in systems and smaller banks may struggle with making these investments.

Rapid technological advancement could, therefore, become a trigger for consolidation. Consolidation by itself is not necessarily a guarantee that the remaining individual banks will be in a stronger position, but an industry with fewer larger banks will stand a better chance of success.”

How many banks does Kenya actually need?

With 44 licensed banks operating in its banking sector, Kenya is slightly overbanked, given its population is around 50 million. The financial sector nowadays is not just limited to the banks. Many fintech startups are popping up every year and causing major disruption in the Kenyan banking system.

To add to it, Kenya witnessed a mobile money revolution in the last decade. M-Pesa revolutionised how an ordinary Kenyan handled or spend his money and completely changed the financial landscape of the country. Also, besides the commercial banks, 73 foreign exchange bureaus, 13 microfinance banks, and 19 mobile money remittance providers are part of the Kenyan financial sector.

What the Kenyan banking system needs is its top five to six banks to control 60 percent of the market shares, Moses Muthui, the director of strategy at Barclays Bank Kenya told a business forum earlier. According to him, the sector also needs around ten to fifteen smaller banks to operate in the system and take over the other 40 percent of the market share. The niche players in the system can play an important role as they serve a very specific market segments which often the top banks does not tap into.

Kenya needs fewer banks

Despite the consolidation of the sector, authorities will not refrain from issuing new licences. Instead, they are expected to continue granting new banking licences in the future. That said, we can also expect more mergers and acquisitions in the sector as experts predict the consolidation will continue in the coming years.

According to the Central Bank of Kenya, banks that will embrace innovation and adopt new technologies will have unprecedented opportunities to change and improve how they provide financial services and products. At the same time, they must manage the risks created by the new digital economy,

The Kenya Bankers Association’s State of the Banking Industry report 2019 revealed that financial technology is increasingly changing the shape of the banking industry in the sense that competition in the provision of financial services is well beyond the formal regulated institutions.

It further states that new entrants with digital prowess will gain prominence, while many incumbent lenders will be forced to alter their strategies to compete. There will be greater industry fragmentation and blurring of industry boundaries, with financial services increasingly offered by an emerging breed of nonbanks.

Richard Njoroge told International Finance, “Consolidation can be regulator driven, such as through requirements for higher capital levels as was the case in Nigeria, or market-driven.  Attempts by the regulator in the past to increase the level of minimum capital have not gone far as these proposals have been blocked in Parliament. In my view consolidation will be driven by business imperatives, which make it difficult for banks below a certain scale to be competitive. Consolidation has taken a while, but we are already seeing this starting to happen. I expect that we will have fewer banks in 10 years’ time.”

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With interest rates higher than those offered by commercial banks, Mali is set to cause a disruption in the fast-changing Kenyan banking sector.

Safaricom’s Mali will allow M-Pesa users to save up to $690 and will offer an interest rate of 10 percent per year.

“The product is supposed to encourage savings where you can put in money and withdraw the next day, but you will have earned something on the money since interest is calculated per day,” a Saraficom executive told the media.

Reportedly, the national savings rate in Kenya is very low and Safaricom sees this as an opportunity. Safaricom wants to tap into the market with Mali.

Experts predict Mali to be more successful than Fuliza, which offered an overdraft facility to M-Pesa users. Fuliza was launched by Safaricom in partnership with a number of commercial banks in Kenya.

Mali is not the only way M-Pesa users can save money. They can also opt to save their money through the Mshwari Lock Savings Account, which was launched in partnership with the newly merged NCBA bank. The Mshwari programme offers an interest rate of 7.35 percent per annum.

At the end of last month, Safaricom, which is Kenya’s largest telecom operator, started a digital postal service that will use mobile phone numbers like the traditional post office box addresses.

Safaricom, which is partly owned by Vodacom and Britain’s Vodafone, launched M-Pesa in 2007. Currently, M-Pesa has around 24 million users.

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Reportedly, banks in Kenya will earn higher profits compared to the banks in Nigeria due to the adoption of technology.

According to the Central Bank of Kenya, the number of bank branches came down which led to higher efficiency. Industry data from the central bank revealed that the number of branches came down from 1518 in 2017 to 1505 in 2018. This is mainly due to the deployment of mobile channels and the decision to hire third-party agents.

The report by Moody’s revealed that banks in Kenya’s cost-to-income ratios averaged 49 percent over the last four years, compared with 57 percent for Nigerian banks. Also, Kenya’s three largest rated banks have stronger cost-to-income ratios than their Nigerian counterparts, despite their higher retail overhead costs.

The banks that have been taken into consideration in the comparison report by Moody’s include KCB Bank Kenya, Equity Bank, Co-operative Bank of Kenya, Nigeria’s Access Bank, Zenith Bank and United Bank for Africa.

The banks in Kenya are also being helped by the Central Bank of Kenya’s decision to remove the interest rate cap, which was introduced in 2016.

Moody’s Analyst and the report’s co-author, Peter Mushangwe said in the report, “Over the coming quarters, we expect banks in Kenya to maintain superior profitability to their Nigerian peers, owing to higher margins, stronger cost-to-income, and lower loan-loss provisioning costs.”

He added, “Kenyan banks will continue to benefit from their higher net interest margins (NIMs) because the recent removal of interest rate caps will support loan yields. However, Nigerian banks’ cost-to-income ratios will likely improve faster as they increase their higher-margin retail exposure while containing costs as they digitalise their operations and limit branch and staff expansion.”

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The scheme is part of Standard Chartered’s plan to tap into the growing population of Africa, 60 percent of which are under the age of 25. Reportedly, mobile-money transactions in Africa account for almost half of the world’s total.

Sunil Kaushal, the chief executive officer of Standard Chartered’s Africa and Middle East business told the media, “Traditionally our customers have been an average age of 50-plus, so the plan is to attract younger customers by offering all our banking services on phones. We are planning to use telecom data to determine the credit profile of customers for our smaller-ticket lending product.”

He said that Standard Chartered already gives customers in Kenya access to investment and insurance products through its mobile phone application and has a partnership with Sanlam, Africa’s largest insurer, to access other markets on the continent.

According to him, besides Kenya, Standard Chartered will soon bring the product to other African nations such as Nigeria.

In Africa, Standard Chartered is also investing significantly to upgrade its digital platforms and develop technologies such as blockchain. According to Sunil Kaushal, the bank added three times the number of retail customers through digital its platform.

At the end of last month, Standard Chartered announced that its profit before tax for the third quarter of 2019 increased by 16 percent to $1.24 billion from $1.07 billion during the same period last year. Net profit for the period also increased by 3 percent from $752 million to $772 million, year-on-year.

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