More than 10 local banks are in Intensive Care Unit, clutching at straws to meet Central Bank of Kenya’s high thresholds for operation even as they lose customers to bigger banks and are unable to offer loans at the capped interest rate of 13 per cent.
While the country celebrates consolidation, these banks are dying, but they can be saved by just tweaking CBK rules to give Kenyans a menu of lenders rather than just a few humongous players who will turn dictatorial in price and rates round the corner.
As Central Bank Governor Patrick Njoroge settles in for a new term, he will remain ensconced among a trusted Curia in the headquarters of Kenyan financial regulation. The hymn this group sets for its choir of banks, brokers, funds and insurers will dictate which notes of success the next few years of economic activity soar to.
Our system is heading inevitably towards concentration of the vast bulk of assets in about half a dozen institutions. Joshua Oigara may construct Kenya’s first trillion-shilling bank by attaching various tattered balance sheets to his current high-quality one. But this will not be the end of it. A rolling set of mergers lies ahead, and we safely assume the governor has managed to swallow his objections to consolidation from some years ago.
Squeeze private sector
Government’s insatiable appetite for debt could squeeze the private sector to the margins of the economy. To offset this we need to draw more risk-bearing capital into the country.
Banks will pay ever more in revamping technology, physical and staff resources. Affording this will need a balance sheet that makes one a player in an economy our size, turning over a substantial volume of payments and transfers as well as earning net interest income on the endowment asset book. I calculate this to be Sh100 billion.
If banks are not making money being part of the payment system, they have to specialise by product, customer segments or lending profile. Some already focus on high-net-worth customers, others talk about financing county government activity; and we have all observed product specialists such as Sharia-compliant banking, digital lending and cryptocurrency.
Of 21 banks in the lower tiers, eight have foreign parents capable of supporting, for strategic reasons, a Kenyan operation of any size. Three have given up the ghost and sold out to larger peers; others will hand over the asset base for management by a peer.
Our biggest current blocks to funding the SME and retail sector are liquidity, distribution channels and risk bearing capital. There are excellent initiatives to use digital platforms to deal with all but the last of those.
The governor will hopefully consider some changes to kick-start letting banks with edgier shareholders, innovative managers or special clients remake the economy.
One of the key ones would be creating Segment One (Sh75 billion and up in assets) and Segment Two banks. The latter could reasonably rely on reputation and the robustness of their product and benefit from loosened regulation in ways including expedited product approvals and launches, reduced capital costs with a two per cent cut in capital ratios, restructured NPL management rules and founding capital reduced to Sh250 million (Segment One would need Sh5 billion).
These lowered thresholds would have a cost: Segment Two banks would no longer be covered by deposit insurance and must participate in the interbank market only through a Segment One peer willing to act as a private sub-regulator.
The CBK needs a strategy to foster the creation of funds that could lubricate the buying and selling of loan books, deepening the derivatives market and bridging capital markets issuance through securitisation. Growing the asset-backed securities market has not moved quickly enough, but it is time to be more aggressive on these.
Ultimately, a deeper, broader, smarter and nimble banking sector would be a legacy worth leaving when Njoroge moves on. So over to you, Governor.