Kenya Consolidates While Ethiopia Opens Up

Kenya continues to be the dominant banking force in East Africa both in terms of domestic as well as foreign expansion. Some local banks are outperforming multinationals. Ethiopia, it now seems certain, is also set to open up its hitherto closed banking sector. Wanjohi Kabukuru reports. While there have been considerable changes in the personalities […]


Kenya continues to be the dominant banking force in East Africa both in terms of domestic as well as foreign expansion. Some local banks are outperforming multinationals. Ethiopia, it now seems certain, is also set to open up its hitherto closed banking sector. Wanjohi Kabukuru reports.

While there have been considerable changes in the personalities running the East African banking industry, the general pattern has remained more or less consistent over the recent past.

Kenyan banks have continued their expansion strategies in the sub-region. Kenya Commercial Bank (KCB), Equity Bank, Cooperative Bank, NIC Bank, Diamond Trust Bank (DTB), and Fina Bank are extending their portfolios across the Kenyan borders into the larger East and Central African region.

The only other bank to venture outside its national borders is the Commercial Bank of Ethiopia (CBE), which is hoping to profit from South Sudan’s emerging economy. In 2009, CBE moved into Djibouti but later closed this subsidiary. Ethiopia is not a member of the East African Community (EAC).

KCB, East Africa’s largest bank, has recently invested some $10m in opening its Bujumbura subsidiary. KCB becomes the first locally owned bank to have a presence in all the five EAC member states covering Uganda, Tanzania, Rwanda, and now Burundi, plus South Sudan.

Other banks following KCB’s lead in expanding their portfolios in the region include Cooperative Bank, which recently opened its South Sudan subsidiary. DTB and Family Bank plan to do the same in Juba in early 2013.

In February 2012, Equity Bank spent $12m to set up its Rwandan operation. Equity Bank first set foot in Rwanda in October 2011 with three branches, but decided to push its official launch in Kigali to February 2012, opening seven branches in Rwanda in an elaborate promotional strategy.

Other than the EAC bloc, the larger Horn of Africa, covering Ethiopia, South Sudan and Somalia, is considered a lucrative business region. Strategies adopted by most banks to reach the majority that still remain unbanked include using technology platforms incorporating mobile phones – and agency banking, which began in Kenya and is now being introduced in Rwanda and Uganda.

Agency banking in Kenya was launched in late 2010, when the Central Bank of Kenya (CBK) changed some of its banking laws to allow banks to offer their services through a third party. According to the CBK, “agent banking is intended to enable institutions to provide banking services more cost effectively to customers, particularly to those who are currently unbanked or underbanked”.

Using new models to reach new customers and expanding their horizons within the region, the trail-blazing banks are raking in profits from their subsidiaries. Both KCB and Equity are the stars of EAC banking, even surpassing the multinational banks. As of September 2012, KCB’s International Business (subsidiaries in Uganda, Tanzania, Rwanda and South Sudan) registered a 70% growth in profits. In 2011, KCB’s International Business profits stood at $6.2m; in 2012 and the profits have grown to $10.5m, justifying KCB’s regional expansion plans.

Equity Bank Group realised $137.9m profit before tax and KCB clocked up $151.8m profit before tax. Barclays Bank of Kenya (BBK) reported a profit before tax for the 2012 third quarter of $108.4m. In the same period, Standard Chartered Bank announced a profit before tax that had grown by 68% to $107.8m.

Ethiopia opens up financial sector

The year 2012 ended on a high note with the positive signal that Ethiopia, long closed to foreigners, was keen to open its lucrative financial sector.

“This is a strong and dynamic region to do business. Financial services companies are expanding both geographically and in response to customer needs, which are increasing in complexity,” Richard Njoroge, assurance partner of PwC, says. “When we look at the industry here in Eastern Africa, there is a convergence of risks and opportunities that will influence the way that we all do business.”

Ethiopian Prime Minister Hailemariam Desalegn visited Kenya in late November 2012, as a signal that Ethiopia was finally opening up for business. He held a breakfast meeting with the Kenya Private Sector Alliance (KEPSA) and later visited milk processor Brookside Dairies, cellular operator Safaricom and the Aga Khan Hospital.

Before he returned to Addis Ababa, Desalegn signed a special status agreement with his Kenyan host President Mwai Kibaki lifting several restrictions that Ethiopia places on foreign investors, key among them on the banking sector.

Kenyan bankers led by Dr James Mwangi, the CEO of Equity Bank, have openly stated their interest in doing business in Addis Ababa. Following Desalegn’s visit, Kenyan banks have received permission to open representative offices there. They can conduct research and credit assessments to allow lending from their Nairobi headquarters but they cannot lend directly to Ethiopians or generate deposits.

Ethiopia’s closed-door policy, however, remains in force to all other lenders. “The whole Western idea that governments have no role in the economy is not feasible. Government must be able to provide lending to areas that it thinks are good for the economy,” Desalegn said. “We still feel the Ethiopian Development Bank serves us well and it would not be to our advantage to allow foreign competition in this sector.”

Currently, Ethiopia has 17 banks operating in the country, 14 of which are privately owned, with total branch cover reaching the 970 mark. According to the National Bank of Ethiopia (NBE), with a population of 80m, Ethiopia is still classified as underbanked, as one branch serves 82,000 people. Total capital of the banks reached $873.7m in mid-2012, indicating a 23.3% growth.

Ethiopia has maintained its double-digit growth, averaging 11.4% over the last eight years, placing Addis Ababa at par with developing Asian nations.

Even with restrictions locking out foreign-based bankers, the Ethiopian banking system is performing well, explaining why this Horn of Africa nation has been attracting envious glances from its neighbours.

Ethiopia’s largest bank, the Commercial Bank of Ethiopia (CBE), which is flexing its muscles in South Sudan’s financial sector, is a state-run entity. CBE, which has assets totalling $8.5bn, has over 12,800 employees and 582 branches across Ethiopia. The 70-year-old bank has 4m account holders. The National Bank of Ethiopia regulates the Ethiopian financial sector, which has 18 banks.

Banks operating in Ethiopia disbursed a significant amount of credit, posted encouraging profits, enlarged their capital bases, and oversaw a reduction of their non-performing loans to manageable levels.

Deposits mobilised by the banking system surged 42.5% and their outstanding loans rose by 24.7%. New loans disbursed amounted to $2.3bn, translating to about 46% higher than last year. Other major players in Ethiopia’s banking sector include Wegagen Bank, which announced a $25m profit in November this year and Zemen Bank, which commenced operations three years ago.

Ethiopia’s move to open up its banking sector has been welcome news to the region where expansion into newer markets is in vogue.

The region’s financial players seem to have all realised that regional integration is key to increasing their profits, growth and expansion strategies.

“Regional trade is expanding, particularly within the East African Community. Financial services companies like banks and insurance companies are increasingly focused on supporting regional clients and satisfying their shareholders’ appetite for accelerated and higher returns,” says Patrick Karara, a senior tax manager at Price Waterhouse Coopers (PwC).

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