Future of Kenya’s small banks murky as bigger rivals swoop on projects - The East African

Future of Kenya’s small banks murky as bigger rivals swoop on projects

Monday July 16 2018

small lenders, savings

Kenya's central bank is quietly engaging the small lenders in merger and acquisition talks to help them voluntarily close shop. FOTOSEARCH 

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Kenya is looking for strong banks that are capable of withstanding shocks to finance large infrastructure projects, a move that has left the future of about 20 small banks hanging in the balance.

The EastAfrican has learnt that the Central Bank is quietly engaging the small lenders in merger and acquisition talks to help them voluntarily close shop.

Kenya’s small banks suffered a run on deposits after the collapse of Dubai, Imperial and Chase banks in quick succession in 2015 and 2016 as depositors shifted savings to big banks.

Kenya has 42 banks including those under liquidation and receivership; data from the Central Bank shows that 20 small lenders control a paltry 8.7 per cent of the banking business compared with eight big banks that control 65 per cent and 11 medium-sized banks with 25 per cent of the market share.

Nigeria, which carried out a wave of consolidation of its banking sector in 2004, reduced the number of lenders from 89 to 25.

Currently, the country has 27 banking institutions, which include 22 commercial banks, four merchant banks and one non-interest bank.

But even as Kenya moves to establish a stable banking sector comprising of a few but strong banks, the National Treasury and the Central Bank are divided on the right approach to flush out weak lenders.

Increased capitalisation

The National Treasury’s attempt to strengthen the banking sector through increased capitalisation requirements from Ksh1 billion($10 million) to Ksh5 billion ($50 million), was rejected by both Central Bank and parliament on the grounds that the policy would kill competition in the industry and hinder new entrants into the banking business.

However, the banking regulator has proposed natural consolidation in the banking sector that will involve sweet-talking small lenders to make them see the sense of mergers and acquisitions.

“I think the point here is that if the entire banking sector sees the issue of strengthening its business model and we have made this point then yes, it would include consolidation,” CBK Governor Dr Patrick Njoroge told analysts during Moody’s 5th annual East Africa Summit in Nairobi.

“We want consolidation but natural consolidation and the way to deal with this is to ask the banks: Where do you see yourself in five years? Are you in the right game? How resilient are you, for the shocks that will be coming and how will you deal with them? We do have such conversations with banks. Already you have seen some consolidations, meaning that it is working and we want to encourage this,” added Dr Njoroge.

Latest mergers and acquisitions

Among the latest mergers and acquisitions in Kenya banking sector are Fidelity Commercial Bank purchased by the State Bank of Mauritius in 2017 and Habib Bank by Diamond Trust Bank in 2017.

Giro Commercial Bank was acquired by I&M Bank in 2017 while in 2016 Tanzania’s Bank M acquired Kenya’s Oriental Commercial Bank.

Other deals included K-Rep Bank’s acquisition by Centum Investments Ltd (2014), Equatorial Commercial Bank’s acquisition by the Mwalimu Sacco Society (2014) and the purchase of Fina Bank by Nigeria’s Guaranty Trust Bank in 2013.

The struggling state-owned banks (National Bank, Development Bank of Kenya and Consolidated Bank) are looking for strategic investors after a government-hired consultant advised against the merger of the three.

“We believe consolidation is going to continue in the sector as weaker banks are acquired by the more stable banks and foreign banks entering the Kenyan banking sector through acquisition,” said analysts at Cytonn Investments Ltd.

“Banks that have common significant shareholders are likely to merge and operate as one entity given the tough operating environment. All this is expected to lead to a more transparent, well-governed and efficient banking sector with fewer players, who are larger and more stable.”


Kenya is keen on reducing the number of banks in the economy to a few that are strong enough to weather shocks, fund large infrastructure projects and charge affordable rates of interest.

In 2015, it took a consortium involving Kenyan banks to lend Ksh35 billion ($350 million) to the state-owned Kenya Pipeline Corporation to construct a new 450-kilometre pipeline from Mombasa to Nairobi.

These consortium of banks included Co-operative Bank, Stanbic Bank (Kenya), Commercial Bank of Africa, Citibank (Kenya), Standard Chartered Bank and Rand Merchant Bank (South Africa).

In 2007, Kenya increased the minimum core capital for banks to Ksh1 billion ($10 million) from Ksh250 million ($2.5 million), setting December 31, 2012 as the deadline.

In 2015, an attempt by Treasury Cabinet Secretary Henry Rotich to further increase the bank’s core capital from Ksh1 billion ($10 million) to Ksh5 billion ($50 million) by December 31, 2018 met intense resistance from Members of Parliament.

Uganda and Tanzania have also increased the core capital requirement for banks in line with the region’s financial sector integration agenda.