A Super Highway for Banks?

In recent years, Kenyan banks were compelled to recapitalise and clear bad debts, scrubbing their Augean stables relatively clean. In the subsequent revival of their fortunes, they have been attracting stellar levels of investment and are setting their sights on expansion beyond the country’s borders. 

Having bolstered their capital base, Kenyan banks have made tentative steps into the Sub-region, opening branches in Sudan, Rwanda, Tanzania and Uganda. Their experience in risk management at home prepared them  for potential success, with a hope of injecting the much-needed vitality into East Africa’s financial institutions. 

They would require a minimum customer deposit of around $100 and charged high transaction fees. Before the entry of Equity and Family banks, many Kenyans were not able to access banking services due to high minimum customer deposit imposed by multinational and major local banks. Banking was a premium service and preserve of the elite. The Kenyan banks seem to have done away with these barriers, opening the possibility of a bank account to many who had been excluded from the formal banking system.

The initiatives of the Kenyan banks have been welcomed widely. “Do they have good credit metrics and the ability to manage risk? My answer is a resounding ‘Yes’!” A ringing endorsement from Joseph Wambia, Chief Investment Officer at the Wambia Capital. 

Kenyan banks can learn from the successes and mistakes made in their home market. Taking an entirely different path from their former models, banks have been reaching out to customers big and small. According to Wambia, this means implicating themselves in the business models and revenue streams of their clients. This is very sophisticated, dynamic and requires that the banker knows his client and business well.  

Many of these banks specialise in specific industries where they have deepest understanding and can measure market risks effectively. However, as Eric Makabuti of Nairobi based Reliable Securities explains, not all of the banks expanding into the sub-region have adequate risk management frameworks and will “get their fingers burnt.” 

Declining margins at home mean that there will not always be a cushion should times get tough. Although East African countries resemble each other somewhat, with strong transversal industries like telecoms that function similarly from state to state, they are not homogenous. The biggest risks will be in entering segments that are not core business units of the parent like venturing into savings and mortgage banking.   

Having procured the cash, either through IPOs, rights issue, mergers and acquisitions, the banks are faced with the task of putting it to work profitably. Generally, the banking industry in the region has experienced a high growth rate. The sharp growth is linked to a jump in credit demand on the strong growth of the construction, transport and communication sectors in the region. 

The banks are employing both acquisition and start-up in their regional expansion strategies. Other leading Kenyan firms are keen to expand to Uganda and Tanzania. They include East African Breweries Limited, Kenya Airways and Jubilee Insurance which have been cross listing across the three countries. 

Analysts have attributed the sudden surge in acquisition interest by the international banks to the growth opportunities in the East African market. “The price for buy-outs will remain high in the coming years as foreign banks increasingly look for lame ducks to acquire,” says a source at Old Mutual Assets Managers (Omam).  

Some banks, like Stanbic, saw this opportunity early when it bought the debt-ridden state owned Uganda Commercial Bank, which it has since fixed, in 2002, making it the leading and most profitable bank in Uganda. This year, Stanbic merged with CFC in Kenya. 

Financial pundits opine that it would be prudent for the banks to consolidate in the local market before going regional. With only 20 per cent of Kenya's population banked, there is need for banks to strategize and reach more of the unbanked, which would constitute a big business growth as opposed to regional. 

Kenya Commercial Bank (KCB) and Equity Bank, exclusive Kenyan brands are pursuing ambitious plans of being the leading financial services providers in the region. In its expansion bid, KCB is planning to open a branch in Rwanda to build on its already expanded network in Uganda, Tanzania and Sudan.  KCB, Kenya's biggest retail bank, is pursuing regional expansion programme, a strategy to meet the ever increasing demand for banking services in Eastern Africa.  

The bank’s Chief Executive Officer, Martin Oduor-Otieno reveals that the bank  plans to open more branches within the region. Last month KCB-Tanzania Ltd got listed on the Dar es Salaam Stock Exchange as part of the bank’s five year growth strategy that will also see the KCB Group listing its shares on all three East African securities exchanges.  

In 2007, a total of $5 million was injected into KCB Tanzania to boost its capital base and capacity to meet the growing needs of the business. The group requires an estimated $74.1 million in additional capital for its expansion into the East African region. The bank will review its products and services in the light of changing customer needs while putting in place a mechanism to offer similar products across its entire network, subject to statutory provisions. The bank is in the process of implementing a new state-of-the-art information technology system. KCB Group is East Africa’s largest locally-owned commercial bank, with a market capitalisation of approximately $1.03 billion. 

On the Kenyan market, KCB launched an Islamic compliant banking service, which has been tailor-made to meet and satisfy the needs of the bank’s shareholders and customers. The bank officials acknowledged that the bank would face challenges in Southern Sudan due to the country's fragility of the legal and regulatory framework. 

The Tanzanian outfit, which has been struggling since it opened doors, has since turned around, while the Southern Sudan branch has also began to draw in results for KCB and with plans to open more branches to consolidate its gains in that market. KCB’s foreign subsidiaries accounted for KShs5.2 billion of its KShs83 billion customer deposit by June 2007. For Uganda, the market is more important given that Kampala is Kenya’s largest trading partner and the bank expects to benefit from the increased business activity in the region, which will grow further as the East African Community takes shape. 

The bank's officials acknowledge that in Southern Sudan, services such as provision of loans require time to develop modalities especially under conditions that would-be borrowers may not have collateral for loans. 

KCB has come through a successful turnaround strategy that has seen it stop making losses to posting double digit growth in net profit in the last two years after posting a net loss of KShs4.1 billion in 2002.  

On the other hand, Equity Bank, a once micro finance institution turned bank with an enormous growth rate, has also begun its race for the region. “A recent 100 per cent purchase of Uganda Microfinance is just a beginning…we have been actively consolidating our dominant banking position in Kenya and seeking prudent regional entry points,” the bank’s Managing Director, Dr. James Mwangi says. 

Other Kenyan banks include Southern Credit Bank, which recently launched a regional expansion programme. In May, the Southern Credit Banking Corporation unveiled a regional expansion programme spanning across Eastern Africa.  

According to the bank’s executive director, Mr Aliraza Yousuf, the institution intends to open branches in Uganda, Tanzania and extend its service hours in Kenya. Among other strategies, the bank plans to upgrade its software to speed up service delivery and extend working hours by 90 minutes. He said the bank would this year improve its telegraphic and swift monetary transfers as part of its strategic and expansion plan. With an asset base of KShs5 billion, the bank intends to increase its capital base this year from KShs500 million to KShs1 billion. 

By Kasembeli Albert 

Kasembeli Albert is Editor of Business Journal Africa, a regional business and finance monthly magazine