When Small Isn’t Beautiful

Published on 3rd May 2005

The banking industry has been characterized by a wide margin between small banks and the large ones. Whereas the big boys capitalize on the market’s conglomerates (mergers and acquisitions, corporate and industrial banking, credit factoring, financial valuation etc), small banks concentrate on their micro-industry of small borrowers.


The condition was perfect as none tried to dig into the market of the other. Mortgage finance companies also had their place and so did the cooperatives.  With time, however, war broke out over who defined who to own what market. It is at this time that banks, and mostly the competitive ones, developed a rounded approach in meeting customer demands.


Now both small and large banks reach to any client with a wide array of products. This seems to be the strategy that most banks are adopting to stay afloat in these tough economic times. However, to stay on to that is not easy and Kenya, as with many African countries is, having the worst of troubles.


One may blame it on the Central banks. This is possible but cannot be the only contributor to the current banking woes. There is also the possibility of bad management practices, the market conditions, the economic climate and so on.  The presence of this should however not be blamed as hindrance but failing to stop is it.


To prove this, lets take the case of Lebanon. Lebanon has had its fair share of hardships over the last couple of decades.  The country was wracked by a civil war for 15years, which destroyed much of the country’s infrastructure.  However, the governor of the country’s Central Bank, Riad Salameh, in 2003 insisted that there was a clear scope for optimism.


To steer growth, therefore, Salameh focused on re-enhancement of financial markets with a focus on the banking sector.  This contributed to growth due to the fact that there is always the possibility of growth when the deposit base is high. At the same time, he strengthened ties with France that gave a long-term $4.5 Billion package at low rates. Interest rates started stabilizing and the investment climate got even better.  This has seen a thriving banking industry with the good fruits of this trickling down to the country’s BOP.


Looking at Kenya, as in most African countries, the case may not be characterized by much optimism. Central bank regulation is seen as a punishment other than compliance mechanism.  This has led to the reduction of the number of players in the banking industry in the post-independence era. 


Latest incidences show the merger and acquisition of banks.  Among them is the East African Building Society with Akiba Bank to form EABS Bank Ltd.  This, to many, is a healthy relationship and the combined capital would be a big boost in terms of market share.


The Commercial Bank of Africa and First American Bank merger involved two large players with corporate rather than individual focus.  The other was the acquisition of the unprofitable wing of the government-owned International Development Bank (IDB) in what seemed to many as a government piecemeal. 


Most banks have been in the trail of small profits and piles of bad and doubtful debts.  It is fact that few players only characterize the industry while the rest of the banks only click small profits with anticipated change that never comes.


The idea of mergers may not be a bad one, though.  But the truth is that this only works for the show – good papers on the reporting end.  But the government’s strategy to encourage the mergers has only given leverage to the multinationals and big banks over the young upcoming ones.


Take the example of Barclays Bank, the largest player in Africa. It recorded profits of close to Kshs4 billion ($52.6 million) in its Kenyan operations alone and customer deposits amounting to Kshs83.8 billion in 2004. The closest local match, Kenya Commercial Bank, which is partially state-owned recorded Kshs793 Million and Kshs52.4 billion in profits and deposits. With the set reporting standards, the small die while the rest thrive at their expense. 


The government should have created an enabling environment for the small banks to increase their base deposits, source for funds through the financial markets and seek expansion as a reach strategy. This would have led to growth and even introduced new players.  We only witness increased closures, buyouts and acquisitions. The governments Treasury bills and bonds that provided so much capital to local and international banks have been characterized by poor yields.


Faulu Kenya, an upcoming micro-finance institution recently announced its bid to float a Kshs500 million ($6.6 million) bond on the Nairobi Stock Exchange. This looks like an idea that should be repeated by more and more companies, but we may wait even longer to see another bank follow suit.


Hope is not gone, however.  Islamic banks that were in the past affected by the Sharia law that regulates them did poorly both locally and internationally.  But with pace-setters like Al Rahji Banking and Investment Corporation, things have only moved from very local to international. The banks achieved this without the involvement of their regulator by devising ways of liquidity management.


The Sharia laws have also cooperated with the conventional banks to crate financial products widely accepted by majority of Islamic banks.  This has given local banks an opportunity to go large-scale in the financing of ships and aircrafts using the Ijara (lease financing) technique.  South Africa has also had a speedy recovery through the government-private sector synergy.


To achieve considerable growth, the private sector should also note that the market is ripe but reaching it is still not well sought.  More players need to be encouraged and regulation made not in favor of some but in favor of the market, and the overall BOP.


It is a fact that there is huge untapped potential in the market.  It is up to the banks to stretch out.  If the local banks do not send a red alert to the regulator, the Central Bank, the multinationals will grab both the big and the small fish. Then we will only come to learn of this when the rivers have run dry.


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