Kenyan banking sector still has plenty of room for growth

Reuters last week reported that Kenyan banks are set for consolidation to meet a deadline to boost minimum core capital and cut costs in a lower interest rate environment.

Although banks are on course for good profit growth this year, senior industry executives say the sharp falls in Kenyan interest rates this year have put pressure on bank margins. Two small lenders, Equatorial Commercial Bank and Southern Credit Bank have already completed a merger this year, citing the need to enlarge their branch network and balance sheet.

“We expect mergers and acquisitions in the sector to continue being driven by the market demands and the need for scale to exploit these opportunities,” Central Bank Governor Njuguna Ndung’u was quoted as saying. “In addition, this allows them to enlarge and serve their market niches,” he said.

In 2008, then Finance Minister Amos Kimunya proposed to raise the minimum core capital for banks to KES 1bn from KES 250m, giving 2012 as the deadline for all banks to comply. Lenders in Kenya have already met the set capital thresholds under the new Basel III rules, but a scramble for opportunities in a more competitive landscape may prompt the regulator to keep a more watchful eye over the institutions.

While the reasons for the mergers do not reflect underlying concerns about the integrity of the banking sector as was perhaps the case when the Central Bank of Nigeria undertook its consolidation exercise, some may argue that Kenya, with 44 licensed commercial banks and two mortgage finance companies, may be overbanked.

BMI in a quarterly research note on the sector, however, suggests otherwise. With World Bank estimates, revealing that formal banking is accessible to only 10% of the Kenyan population, penetration levels remain low, suggesting that despite the large number of banks, there is still plenty of room for growth.

The sector accounts for only 40% of GDP in Kenya and is even lower in neighbouring East African Community (EAC) countries, and much of the Kenyan banking sector’s activity is concentrated among the richest 20% of the population. The population is massively under-banked, largely because more than half of the people in Kenya lives in rural areas and earn meagre wages.

Higher incomes and urbanisation will increase demand for banking services, while assets in the form of loans to industry and consumers should also rise. The sector remains one to watch.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.