Kenyan Finance Minister Pushes Bank M&A to Force Rates Lower

  • Treasury Secretary Rotich says policy is to ‘consolidate’
  • Steps proposed to boost oversight of deposit insurance company

Kenya is counting on fewer banks to reduce borrowing costs and stimulate growth in East Africa’s biggest economy, Treasury Secretary Henry Rotich said.

Rotich is pushing proposals to force takeovers and combinations to weed out the weakest lenders and create larger institutions able to wield their size to offer lower interest rates on loans. It also comes as cash-starved banks struggle to raise cash in financial and interbank markets, forcing them to pay higher interest rates on savings to attract deposits, and pushing up the rates they charge on loans.

“Almost 1 million customers per bank is way below the international norm of about 3 million customers per bank,” Rotich said in an interview June 24 in the capital, Nairobi. “Part of the reason why we have higher interest rates is many banks are competing.”

Kenya’s financial authorities have repeatedly asked commercial lenders to reduce their loan charges to stimulate demand for credit in a country where central bank data show only 4.4 percent of the population have a formal bank loan and 1.2 percent of people use a credit card. Rates charged on loans average 18.1 percent compared, with the benchmark central bank rate of 10.5 percent.

Consolidation Policy

In South Africa, the continent’s most industrialized economy, a 2014 survey by FinMark Trust found 13 percent of adults borrow from banks and 7 percent have credit cards. 

Kenya has more than 42 operating banks serving more than 40 million people, with five banks controlling 70 percent of the country’s banking assets, according to Rotich. Nigeria, Africa’s biggest economy, has 22 banks catering to a population of 180 million and gross domestic product that is nine times bigger, according to Cytonn Investments Management Ltd., a Nairobi-based money manager.

“The policy direction is consolidate,” Rotich said. “If it is 30 banks competing well, if it’s 15, very well.”

Rotich, 47, this month revived proposals that would require lenders to increase their core capital fivefold by 2019 to 5 billion shillings ($49 million) as regulators grapple with the fallout of three bank collapses over an eight-month period.

Dubai Bank Kenya Ltd., a closely held lender, was placed into receivership in August after it breached daily cash-reserve-ratio requirements. Two months later, Imperial Bank Ltd. was closed down amid claims of fraud that company executives deny. In April, Chase Bank Kenya Ltd. was seized by regulators following a run on deposits. While Chase Bank reopened in April, shareholders of Dubai Bank and Imperial are still contesting their closure in court.

Tougher Supervision

The failures have spurred Rotich to push proposals to tighten supervision of the nation’s banking industry with measures that will include strengthening the independence of the Kenya Deposit Insurance Corp. by removing directors of commercial banks from roles at the state-run agency. The KDIC, which is governed by a board comprising the central bank governor and the Treasury permanent secretary under the Banking Act, was appointed to handle the management of Imperial, Dubai Bank and Chase.

For a past story on Kenyan bank takeovers, click here

“The KDIC is meant to be an independent agency, independent of Treasury and also the central bank,” Rotich said. “If you look at the way it is now, all people working in KDIC are from the central bank, it’s almost like an extension of a department of the central bank. That’s not what the Act says, the Act says it has to be standalone.”

Statutory management and liquidation of banks should be done “at arm’s length” from the central bank, whose role Treasury wants limited to supervising the industry and monetary policy, Rotich said. “If they are fused, there is conflict of interest and as we speak now there is because staffing there is all of them central bank.”

Many of the challenges in the banking industry have little to do with capital levels and more with governance and transparency issues, James Mwangi, the chief executive officer of Equity Group Holdings Ltd., Kenya’s biggest bank by market value, said last week. Equity Group’s stock has declined 3.8 percent this year, the best-performing bank in the FTSE NSE Kenya 25 Index of the nation’s most liquid stocks, which is down 4.8 percent.

“Strengthening a banking industry is not purely about regulation,” he said. “It’s good to have regulation, but what may be required is strengthening the capacity of the leadership of the organization itself, strengthening the oversight itself. You can have rules but regulations that are not observed or implemented.”

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