Could community banks tame the big players?

The debate on capping interest rates elicited lots of emotions.

One reader even asked me if I own a bank. I do not, but I dream of owning one in my lifetime. Or I could take a short cut and become a shylock. Enforcing repayment would be my biggest problem, but I am informed this can easily be outsourced.

One other approach to lowering interest rates is to give big banks more competitors. It is not that I dislike big banks (though one asked me for my CV to approve a mortgage loan), but I think, without prejudice, that our big banks have too much power and need a countervailing force.

We need the siafu approach to tame big banks. If you have watched safari ants attack someone or something, you know what numbers can do. Why can’t we licence more banks, particularly community banks that are more in tune with the needs of local communities?

Microfinance banks (MFBs) were supposed to take this role, but they are as concentrated as big banks, with three MFBs controlling 93 per cent of the market. Further, most MFBs are headquartered in Nairobi or its environs, and their interest rates are not that different from big banks’.

Though we devolved political power through the Constitution, we did not devolve economic power. Giving counties money is not equivalent to economic empowerment. Economic power comes from generating your own wealth. Beggars have no economic power.

One way to devolve economic power is to make formal access to funds easier. Some could argue Saccos, merry-go-rounds and shylocks provide funds. But enforcement and intermediation is not as thorough as with banks.

Nations that rapidly developed rode on an efficient financial system accessible to all despite their social economic status. Suppose an illiterate multi-millionaire was asked for a CV? More community banks could devolve economic power.

Buying into the myth

Why don’t we have Shamakhokho Bank in Western Kenya, Kanyonyo Bank in Kitui or even Ituramiro Bank in Kiambu? The US has about 6,900 community banks. With a population of 320 million, that translates to one community bank for every 47,000 Americans.

In Kenya, the ratio is 3.5 million Kenyans for every MFB, if we assume they are our version of community banks. Clearly, we have all bought into the myth that Kenya is overbanked.

Switzerland has 282 banks, Germany 1,767 and the UK 360, says the European Union. Compare their populations with ours.

Is Kenya over-hoteled or over-schooled? There is no way banks would be making such huge profits if the country were overbanked, unless they defy the laws of supply and demand.

Community banks have lots of advantages over big banks. Marshall Lux and Robert Greene of Harvard Kennedy School in The State and Fate of Community Banking highlight some of the advantages of community banks in the US that can easily be extrapolated to Kenya.

Community banks focus their attention on the needs of local families, businesses and farmers. Conversely, many of the big banks are structured to prioritise serving large corporations.

Unlike many larger banks that may take deposits in one state or county and lend in others, community banks channel most of their loans to the neighbourhoods their depositors live and work in, helping keep local communities vibrant and growing.

Impersonal criteria

Community bank officers are generally accessible to their customers on-site; CEOs at big banks are often headquartered in office suites, away from daily customer dealings.

Community bank officers are typically involved in local community affairs, while large bank officers are likely to be detached physically and emotionally from the communities that host their branches.

Many community banks are willing to consider character, family history and discretionary spending in giving loans. Big banks, on the other hand, often apply impersonal qualification criteria, such as credit scoring, on loan decisions without regard to individual circumstances.

Community banks offer quick decision making on loans because decisions are made locally. Big banks often convene loan-approval committees far away from applicants’ localities.

Most importantly, community banks are themselves small businesses and better understand the needs of small-business owners.

Some could argue that with Internet and mobile banking, we do not need community banks. But we need them to not just offer loans, but also catalyse other sectors with their ideas and formalisation. They midwife corporatisation and shift the economy into higher productivity levels by ensuring intermediation and honouring of financial contracts.

You could contest this, but we were almost there in the 1980s when several banks sprouted across the country. Though mismanagement was blamed for their eventual failure, politics was a factor, too.

The founders, some still active in the financial sector, must be given credit for being futuristic. It is time we revisit this idea — just as we need to revisit the Nyayo car.

The writer is senior lecturer, University of Nairobi. [email protected]