Kenya’s banks, stymied at home, seek growth abroad
Access to credit for small businesses across sub-Saharan Africa is a challenge, with a reported annual financing shortfall of $330 billion across the region.
In Kenya, a 2016 regulation to protect customers from expensive loan repayments has been cited as a factor in reduced levels of credit to small and medium-sized enterprises (SMEs) which has constrained overall economic growth.
Legislators and regulators have been at loggerheads over the introduction of a cap on interest rates set at 4 percentage points above the central bank’s benchmark. Most recently, a parliamentary committee announced in mid-September that it would block the move to remove the ban as has been mandated by the court.
- The cap poses challenges for banks in what is already a highly concentrated and competitive market, with a small number of the country’s 42 licensed lenders holding half of the market’s deposits and loans.
As banks respond to regulatory challenges in an increasingly competitive marketplace, two trends can be seen: consolidation at home and expansion in external markets.
Stronger at home
Mergers and acquisitions have been prevalent in Kenya’s banking sector, with three mergers and six acquisitions taking place since 2010.
Given the large number of market players, a level of consolidation has been inevitable, though the pace has picked up since the introduction of the interest rate cap, with three acquisitions since 2016 and several major mergers announced in 2019.
- NIC Group and Commercial Bank of Africa received regulatory approval for a merger from shareholders and from the Competition Authority of Kenya in January, and are awaiting approvals from other authorities.
- In April, KCB, recognised as the biggest bank by assets, submitted a bid to acquire a smaller lender, National Bank of Kenya, a deal which has been informally approved by the regulator, though a number of issues are still outstanding as of September 2019.
Banks with an external footprint have been able to use profits from these operations to offset some of the revenue-generating challenges caused by the introduction of the interest rate cap.
A number of Kenyan banks, such as Kenya Commercial Bank, NIC Bank and Equity Bank, have a strong and growing presence in other East and Central African countries through subsidiary operations.
- Equity’s current moves to acquire a controlling stake in Commercial Bank of Congo, for which it is expected to pay at least $170 million, is the latest in a string of purchases to raise its holdings in Zambia, Mozambique, Tanzania and Rwanda.
The outward looking strategy can be seen as part of a wider trend on the continent, with two of South Africa’s biggest lenders reporting that their H1 results relied heavily on the strong performance of operations elsewhere in Africa given challenging conditions at home.
- Standard Bank, which has a presence in 20 African countries, reported a 5% rise in H1 profits, largely down to its operations outside of South Africa, which contributed more than a third (34%) of headline earnings.
- Absa, meanwhile, attributed 20% of its earnings from regional operations on the back of 8% growth in these offices. Both banks have plans to further expand their exposure to Africa’s growth markets.
Bottom line: These expansionary agendas look set to bring further competition into financial services markets of Africa’s top growth markets, just at a time when consolidation at home is building bigger banks, creating a race to the top that smaller players will find difficult to compete in.
This piece is based on Asoko’s market map of Kenya’s top tier banks. Read the full report here.