A Rwandan company needs to urgently pay money it owes a Kenyan company but wants to avoid processing an expensive telegraphic transfer. An entrepreneur with companies across East Africa wants to be able to move money within the group of companies without being charged for each transaction. A citizen simply wants the convenience of dealing with the same bank that he or she has banked with since college.
These everyday examples show how business needs in East Africa are becoming more complex with each day. Rapidly increasing trade within the East Africa Community (EAC), plus the growth in members (Burundi and Rwanda joined last year) and the fact that member countries are becoming more inter-connected through major projects – such as a proposed pipeline to Rwanda from Kenya through Uganda or submarine and terrestrial high-speed telecommunications links – are all factors that are beginning to drive ever-increasing demands and opportunities for businesses in the region. Before the revival of the EAC, Kenya’s recorded trade with Tanzania and Uganda in 1990 was too insignificant to measure. It has since grown to almost 30% of Kenya’s total trade. This rapid commercial evolution has seen business needs move from companies wanting standard current accounts with overdraft limits and maybe savings accounts to now regularly needing cross-border financial services.
Hubs, cables and cash
Instead of the traditional cash deposit and withdrawal relationship with a banker, businesses are looking for financial institutions that can also add value to their companies, helping them better manage their businesses for example. The growth of this demand has led inexorably to the expansion or reorganisation of Kenya-based banks in the East Africa region.
Multinational banks such as Standard Chartered Bank, Barclays Bank, Stanbic Bank, Diamond Trust Bank and Bank of Baroda have long used Kenya as a hub for the wider East Africa region.
With changing trends in East Africa, however, they are restructuring. In May 2008, Barclays Bank Africa created an East and West Africa division comprising Ghana, Kenya, Tanzania and Uganda. The head of that division is Kenyan banker Adan Mohammed, who continues in his role as managing director of Barclays Bank Kenya, suggesting the bank sees Kenya as its hub.
Standard Chartered Bank and Stanbic Bank have both reorganised and expanded their investment services businesses, basing their regional offices in Kenya. This follows a slew of infrastructure financing deals they have worked on in the region over the past few years and the sense that those are bound to increase. An example is Standard Chartered Bank’s involvement in securing private-sector investment in the Kenyan government-fronted The East Africa Marine Systems (TEAMS) submarine fibre optic project. TEAMS is scheduled to be in operation in 2009.
Now Kenyan-owned banks are catching up with their Kenyan-owned manufacturing companies and individual professionals. For a decade or more, Kenyan manufacturers, companies and professionals have sought opportunities across the borders but, with the exception of Kenya Commercial Bank, Kenyan-owned banks have focused on the country’s main urban centres. Now, a growing number of them have begun looking beyond national boundaries seeking business opportunities.
Equity Bank and I&M Bank are this year’s addition to Kenyan-owned banks looking outside the country’s borders for new business. In all, 11 banks based in Kenya have or are gaining a presence beyond Kenya. The multinational institutions act primarily as retail banks and have large companies as clients because their share capital allows them to do so while staying within central bank rules about deposits-to-capital or loans-to-capital ratios.
The Kenyan-owned banks have, on the other hand, moved into niche markets and deal with smaller companies because many of them are medium-sized banks. For example, the owners of Fina Bank took a decision in 2004 to focus the institution on two areas of business: becoming a bank for small and medium-sized enterprises (SMEs) and exploring opportunities in the region, says Robert Warlow, the bank’s group chief operating officer.
The idea of focusing on SMEs comes from the fact that, though many banks offer services to the SME sector, they tend to be impersonal, according to Warlow’s explanation of the bank’s strategy to The Africa Report (see Interview). A key difference between Fina Bank and other banks, he says, is that it has dedicated relationship managers for its SME customers and restricts each manager to at most 70 clients.
On the subject of the regional expansion of the Kenyan banking industry, Warlow says: “It’s clear there’s going to be ever more increased regional trade as the years go by.” What was lacking was a regional player. Even the multinationals were disjointed. So Fina Bank decided to position itself as “the regional SME bank”.
Creating niche markets
Group Chief Operating Officer
Just as Fina Bank was rethinking its strategy, Rwanda put up for sale a small government-owned bank and a privately-owned one. In August 2004, Fina Bank won the bid to buy a controlling share in the privately-owned Continental Bank of Rwanda. The government sold it after placing it under central bank management because of financial difficulties.
The sale of the Rwandan bank coincided with the development of Fina Bank’s new strategy. Fina has since renamed its acquisition Fina Bank Rwanda, and while offering traditional services, it is also positioning it as the go-to bank for SMEs.
In pursuit of its regional strategy, Fina launched a new product that allows an account holder in one country to pay another account holder in a different country at a cost lower than that offered by money transfer services.
Fina Bank, which began as a non-banking financial institution in January 1986, will open another six branches in Kenya this year, increasing its total branches to 14. In Rwanda it will add five more branches this year, giving it a ten-branch network by year’s end. In August, Fina Bank will open its Uganda operations. “Being in Uganda will complete a big piece of the jigsaw,” says Warlow.
Good banks make good neighbours
Another Kenyan-owned bank set to move into Uganda is the country’s largest bank in terms of number of accounts held, Equity Bank. Having carved a niche for itself as a microfinance bank, Equity Bank announced in April 2008 that it had reached a conditional agreement to buy Uganda Microfinance. Equity Bank is listed on the Nairobi Stock Exchange (NSE) and so needs to satisfy regulators at the NSE, the Capital Markets Authority, as well as the central banks of Kenya and Uganda.
Earlier this year, the medium-sized trade-finance and corporate banker, I&M Bank, bought 50% of the Mauritian financial institution First City Bank of Mauritius. This indicates that Kenyan banks are also looking beyond the traditional East Africa markets of Tanzania and Uganda towards other countries in the wider region that may be open to business.
Earlier, a merger between the Kenyan-owned Commercial Bank of Africa and First American Bank in March 2005 saw the new bank retain the name Commercial Bank of Africa and also returned Commercial Bank of Africa to its Tanzanian roots because First American had a Tanzanian subsidiary, United Bank of Africa.
The two banks merged because they had common Kenyan shareholders, including leading industrialist Naushad Merali, and wanted to boost their share capital in anticipation of growing business and more stringent central bank regulations.
Commercial Bank of Africa was founded under a different name in 1962 in Dar es Salaam, from where it expanded into the capitals of neighbouring Kenya and Uganda. But following the adoption of nationalisation policies in Tanzania and economic turmoil in Uganda during the rule of military dictator Idi Amin, the bank was soon left with only its Kenya operation.
The experience of what later became Commercial Bank of Africa explains why Kenya has been used as a hub for financial services by foreign-owned and Kenyan-owned banks. Tanzania only reversed its nationalisation policy in the 1990s, which was around the same time as Uganda began turning the corner, after its two decades of conflict and economic decline.
Liberalisation policies pushed by the IMF and World Bank saw more locally-owned banks open in the 1990s in Kenya, a number of them acting as outlets for the corrupt proceeds of young politically-connected individuals. This boom in banking followed a scare in the mid-1980s that saw the Central Bank of Kenya close several locally-owned financial institutions. The central bank later merged them into one commercial bank, Consolidated Bank of Kenya. After a mix of finance ministry rules raising share capital requirements, closures, mergers and new entrants to the sector, Kenya’s commercial banks have grown in number to 43 to date.
Most of Kenya’s banks have branches in the capital, Nairobi, the ports of Mombasa and Kisumu and a few other urban centres. And about 3m Kenyans hold accounts out of an estimated population of about 34m, indicating that Kenya’s problem may not be the number of banks it has but the way they do business. Fina Bank’s Robert Warlow accepts that Kenya still has a large population without bank accounts, but he argues: “You don’t have to be all things to all people. It’s about being a niche player. You don’t have to be a big player to be a niche player. You don’t have to be big and bold to be a success. The big and bold can come later.
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