Kenya is seeking a consultant to advise on the merger of three state-owned banks in its bid to create a strong institution with the financial power to compete with its peers.

The government is on course to combine National Bank of Kenya, Consolidated Bank of Kenya and Development Bank of Kenya into one, even though legislators have shot down a proposal seeking to increase the capital base of Kenyan lenders from Ksh1 billion to Ksh5 billion, claiming the move would stifle competition in the industry.

National Treasury Cabinet Secretary Henry Rotich told The EastAfrican that plans to merge the three banks are under way and that they are shopping for a transaction adviser.

“My technical team is trying to identify a transaction adviser to make recommendations on how this merger will be executed,” Mr Rotich said.

The three banks have a combined core capital of Ksh13.17 billion ($122.94 million) and were earmarked for privatisation.

NBK’s core capital is estimated at Ksh10.34 billion ($96.52 million) while DBK and Consolidated Bank have core capital in the range of Ksh1.74 billion ($16.24 million) and Ksh1.08 billion ($10.08 million) respectively.

The top five banks by capitalisation, according to data from Central Bank, are KCB — which has a core capital of Ksh57.8 billion ($539.57 million); Equity Bank Ksh40.73 billion ($380.22 million); Barclays Bank Ksh37.98 billion ($354.55 million); Co-operative Bank Ksh37.46 billion ($349.69 million); and Standard Chartered Ksh28.94 billion ($270.16 million).

Plans by NBK to become a top-tier bank in 2017 hit a dead end after the government, which owns a 22.5 per cent (63 million shares) shareholding, declined to approve a critical capital raising proposal owing to the proposed merger.

This left the parastatal in a precarious position, forcing it to sell some of its assets, including 12 branches, to survive.

The state-owned National Social Security Fund (NSSF) controls 48.06 per cent (134.54 million shares) stake in NBK.

The stock held by the National Treasury and NSSF in NBK is in the form of preference shares but the two anchor shareholders are hesitant to convert these shares into ordinary shares to pave the way for a cash call.

“On NBK, we are yet to make a decision whether to convert our preference shares to ordinary shares first before considering taking up any rights issue,” Mr Rotich told The EastAfrican.

Constrained by capital, NBK is unable to increase lending and grow its loan book.

CBK’s statutory requirements prohibit banks from lending more than 25 per cent of their core capital to a single borrower.
NBK had planned to issue up to 1.12 billion new shares to existing shareholders through a rights issue, a plan that is still on hold after two years.

Mr Rotich said Kenya’s banking industry was likely to undergo mergers and acquisitions after he announced the new capital requirements for the banks.

Though the proposal was rejected by parliament, he said he would lobby the MPs to reconsider it.

“We shall continue to push for the review of that decision by building a strong case for why we need strong banks,” said Rotich.

The proposal provided that banks increase their core capital from Ksh1 billion ($9.33 million) to Ksh2 billion ($18.67 million) by December next year (2016), Ksh3.5 billion ($32.67 million) by December 2017 and finally Ksh5 billion($46.67 million) by December 2018.

If implemented, the move could have affected more than half (23) of Kenya’s lenders.

In September, I&M Bank announced a deal to buy out Giro Commercial Bank, one of Kenya’s smallest banks with a core capital of Ksh2.33 billion ($21.75 million) and seven outlets.