Kenya plans to merge three state-owned development financial institutions into a mega bank, in an attempt to raise funds for its infrastructure projects, amid growing public debt.
The Industrial and Commercial Development Corporation (ICDC), IDB Capital and the Tourism Finance Corporation (TFC), which have a huge combined balance sheet, have been earmarked for amalgamation to form the Kenya Development Bank (KDB).
The structure of the proposed bank is still under discussion, but The EastAfrican has learnt that the government will be leveraging the large balance sheet of the unified bank to secure long-term funding from foreign financiers, using a banking model similar to that of the East African Development Bank and the African Development Bank.
In September, the National Treasury floated a tender for a consultant to advise on the merger of the three institutions. The tendering period closed on September 18.
A task force in place chaired by the National Treasury has been set up. It comprises the managing directors of the three institutions to be merged, their respective parent ministries, State Corporation Advisory Council and the Attorney General.
According to the proposal, the assets of the three development finance institutions will be transferred to the new company, KDB.
ICDC has 21 subsidiaries and associated companies, including Centum Investments Ltd, Agro-Chemical and Food Company Ltd, Development Bank of Kenya Ltd, Uchumi, Eveready Batteries Ltd, General Motors East Africa, and AON Minet Insurance Brokers Ltd.
TFC has shareholding in mature equity investments, which include Kenya Safari Lodges and Hotels, Sunset Hotel (Kisumu) and Golf Hotel (Kakamega).
Its other investments are Kabarnet Hotel, Mt Elgon Lodge, Mountain Lodge, Hilton Hotel, InterContinental Hotel, Buffalo Springs Lodge, Maralal Safari Lodge and The Ark.
Kenya is looking for funds to finance its mega projects under the Vision 2030 development blueprint and to fund the government’s Big Four agenda: Boosting manufacturing activity; ensuring universal healthcare; affordable housing; and food security.
Struggling state banks
The country, however, faces a significant infrastructure financing deficit estimated at $2.1 billion annually, which is stifling growth.
It is argued that a sustained expenditure of about $4 billion per year will be required to meet the country’s infrastructure needs. Kenya requires an estimated Ksh2 trillion ($20 billion) to finance the Vision 2030 blueprint covering roads, rail, ports and energy projects.
The government’s initial plans to force consolidation of weak banks into stronger units by raising the minimum core capital from Ksh1 billion ($10 million) to Ksh5 billion ($50 million) was rejected by both lawmakers and the Central Bank on the grounds that the move would kill competition and discourage new players from entering the banking business.
In addition, the government’s bid to merge three struggling state-owned banks — Consolidated Bank, Development Bank of Kenya and National Bank — was abandoned after a South African consulting firm Genetics Analytics, advised against it.
In 2015, it took a consortium involving several Kenyan banks to lend Ksh35 billion ($350 million) to the state-owned Kenya Pipeline Corporation to construct a new 450km pipeline from Mombasa to Nairobi.
These were Co-operative Bank, Stanbic Bank Kenya, Commercial Bank of Africa, Citibank Kenya, Standard Chartered Bank and Rand Merchant Bank (South Africa).
According to the World Bank, Kenya’s infrastructure financing deficit cannot be met using public resources, since public debt has ballooned to Ksh5 trillion ($50 billion), about 57 per cent of GDP.
The Bank argues that the country needs to mobilise the private sector and local currency to finance infrastructure needs.
Kenya is also developing programmes to foster private-sector participation in infrastructure investments to help address the funding gap in the sector.
The World Bank Group has provided $90 million to kick-start Kenya’s public-private partnership programmes.
This has resulted in a new PPP law, and a pipeline of projects in roads, health, and water and sanitation that is meant to advance Kenya’s social and economic development goals.
According to the AfDB, Africa requires $130 billion to $170 billion a year to meet its infrastructure needs with a financing gap in the range of $68 to $108 billion.
More than $100 trillion is managed by institutional investors and commercial banks globally giving African countries seeking financial resources for infrastructure developments a wide variety of financing options.
Kenya has 42 banks, including those under liquidation and receivership, and data from Central Bank shows that 20 small lenders control a paltry 8.7 per cent of the banking business compared with eight big banks which control 65 per cent of the business and 11 medium-sized ones with a 25 per cent market share.
Nigeria, which carried out consolidation of its banking sector in 2004, reduced the number of lenders from 89 to 25 and now has 27 banking institutions, which include 22 commercial banks, four merchant banks and one non-interest bank.