Faced by rising costs from large depositors, Kenyan banks are turning to retail investors for cheap funds.

Latest Central Bank of Kenya figures show loans grew faster than customer deposits last year, meaning there was a need to urgently attract the latter.

Consequently, deposits grew by 4.7 per cent in the first quarter of 2012, compared with loans and advances, which grew by 4.2 per cent.
In the year ending December 2011, loans and advances grew by 31 per cent compared with 21 per cent for deposits.

Over the past five months, out of the top five commercial banks — Barclays, KCB, Equity, Co-operative Bank and Standard Chartered — four have rolled out promotional campaigns to lure depositors in the wake of increased competition. Only Equity Bank has not rolled out a promotional campaign. The focus on retail investors to grow deposits is based on the need to reduce reliance on big depositors who demand higher interest rates.

“Commercial banks offer retail investors interest rates of as low as 4 per cent, compared with institutional investors who are demanding rates as high as 12-13 per cent,” said Kamau Kuria, an analyst at Old Mutual Securities.

Banks are hoping the cheaper funds from retail customers will halt the steep rise in interest expense — the interest banks pay customers for their deposits — which in the past quarter jumped three times compared with the same period in 2011.

In the first quarter of 2012, the top five banks paid out a total of Ksh2.5 billion ($29.76 million) in interest expense compared with Ksh600 million ($7.14 million) in the same period in 2011. Interest expense is the second biggest direct cost after employee costs for most banks.

Barclays’, Equity’ and Co-op Bank’s interest expense jumped three times to Ksh793 million ($9.4 million), Ksh1.19 billion ($14.16 million) and Ksh2.5 billion ($29.76 million) respectively. KCB’s and Standard Chartered’s interest expenses grew by four times to Ksh2.77 billion ($32.97 million) and Ksh837 million ($9.96 million) respectively.

With the benchmark 91-day Treasury bill currently paying interest of 11 per cent, large investors are opting to put their money in government securities, which in return is squeezing banks out of funds they need for expansion, contributing to the shift towards retail deposits.

Analysts at Old Mutual Securities further point to the losses on bonds made by banks last year and early this year as partly fuelling the renewed eagerness to attract deposits among commercial banks.

“Banks made substantial losses on government securities last year, which wiped out part of their capital and thus the renewed focus on mobilise deposits to increase their assets,” said Mr Kuria.

Competition among local banks has seen the former, which 10 years ago trailed foreign banks in both assets and profits, turn the tables to occupy the top two spots in bank rankings.

Back then, Barclays Bank and Standard Chartered were the most profitable banks, but today Equity and KCB occupy the top slots, with Co-operative Bank threatening to dislodge Barclays and Standard Chartered from the third and fourth spots respectively.

Deposits remain the primary source of funding for banks, representing 75 per cent of their total liabilities. Meaning for banks to maintain their growth path, they have to take in more deposits.

But with banking rules in Kenya providing that banks can only take in deposits up to a maximum of 12 times their capital, and lend out a maximum of eight times their capital, the appetite for additional deposits is pushing banks to turn to shareholders for additional capital.

Standard Chartered Bank is planning to raise Ksh2.3 billion ($27.38 million) from its shareholders through a rights issue. The funds will supplement a Ksh1.7 billion ($20.23 million) loan from its London-based holding company to boost its capital base ahead of the rights issue expected later this year.

DTB, NIC and CFC Stanbic banks have also said they are looking at raising funds through rights issues. KCB raised Ksh12 billion ($142.85 million) through a rights issue in 2010.

The banks are also banking on the funds to support their regional expansion plans, with Standard Chartered is looking to finance its entry into South Sudan.

NIC and CFC Stanbic need the funds to support their newly launched operations in Uganda and South Sudan respectively.