Kenya: Regional Powerhouse

Kenya, which has the largest and most developed economic infrastructure in East Africa, also has the subregion’s widest spread of banking and finance institutions. Kenya has 43 commercial banks, one mortgage finance company, six deposit-taking microfinance institutions, three representative offices of foreign banks, 121 foreign exchange bureaus and two credit reference bureaus to showcase its financial muscle in the East African region.
Kenya’s latest strategy to reach the huge population of the unbanked – rolled out in 2010 as the Agency Banking Network – saw the number of banks approved by the CBK to undertake agency banking reaching 10. Collectively, the 10 banks have 7,999 agents registered across the country. The banking sector accounts for 40% of the country’s GDP.

The entire Kenyan banking sector attracted 13.65m customer account deposits and a network of 1,114 branches countrywide. The Kenya banking industry balance sheet grew by 5.3% from $21.1bn in June 2011 to $22.2bn in September 2011. Loans and advances, government securities and placements were the key drivers of this balance sheet.

In a country with a population of 38m, one could easily jump to the conclusion that Kenya is overbanked – but the World Bank estimates still show that only 10% of Kenyans have access to formal banking services. Mobile services, provided by institutions such as Equity Bank and the advent of m-banking pioneered by telecoms provider Safaricom, have vastly increased the number of people who can now access services, such as money transfer, usually provided by the formal banking sector.

The major Kenyans still dominating the scene include Equity Bank, Kenya Commercial Bank (KCB), Barclays Bank of Kenya, Cooperative Bank, Standard Chartered, National Bank of Kenya (NBK), Diamond Trust Bank (DTB), NIC Bank, Commercial Bank of Africa (CBA) and CFC Stanbic.

According to the Central Bank of Kenya (CBK) Governor Professor Njuguna Ndung’u, “despite the local and global turbulences experienced over the past year, the banking sector remained stable and exhibited resilience. The sector has continued to grow and expand both locally and regionally to new markets within East Africa and beyond.” Ndung’u added: “Our appeal to the banking sector is to put up strategies that will support and stimulate the private sector. Banks stand to benefit from a strong and vibrant private sector.”

Over the years, Kenyan banks have recorded impressive profit margins, steady growth in assets and even deposits despite the sharp fall of interest rates, a weakening shilling and spiralling inflation triggered by high food and fuel prices.

Even though daring Kenyan banks dominate the subregion, the country’s highly innovative landscape has seen banks facing stiff competition for their traditional market by new upstarts in the financial sector where they once dominated. A key plank cited by financial analysts in the overtly competitive nature of Kenya’s financial sector is the robust and adaptive financial regime that has seen a constant stream of new products rolled out almost every quarter. According to the International Finance Corporation (IFC) in its Doing Business in East Africa 2011 report, Kenya has some of the most business friendly regulations in the region.

“Banks in Kenya are fighting for market share with existing players, responding to the influence of non-banking players such as microfinance institutions and mobile banking products.” The 2011 Risk Survey by PwC reveals. “With the introduction of fully-fledged Sharia banks, there is more competition for customers who seek services compliant with Islamic Sharia law. Interest rates on government securities have declined in recent years and banks have lent more to customers so as to earn higher returns, increasing competition among banks.”

The competition offered to banks has mainly been associated with M-Pesa (mobile banking platform offered by cellular phone operator Safaricom). It is this competition which has seen the major banks, notably Equity Bank, KCB, Barclays and NBK seeking to raise extra funds to boost their expansion plans. Standard Chartered Kenya has already revealed that in 2012 it will be raising extra capital. Currently the bank is mulling over issuing a bond or selling additional shares to current shareholders.

“We are currently considering a number of capital-raising options in 2012 in order to bolster our core capital,” Richard Etemesi, managing director Standard Chartered, says.

While Equity Bank is still riding high from the $180m injection by Helios and KCB is still undertaking its ‘Transformation Programme’ courtesy of its 2010 rights issue, CFC Stanbic has indicated that it is also planning a capital-raising rights issue later this year.