Magufuli ghosts return to haunt Kenyan firms as bid to crack TZ flops
By Dominic Omondi and Patrick Alushula
| Dec 7th 2021 | 7 min read
KCB Group might have taken the wrong path to regional banking supremacy.
The Tanzanian route is somewhat jinxed.
The listed lender’s foray into the region might have started in Tanzania where it launched its operations away from home in 1997, but Dar es Salaam has not warmly embraced the Kenyan bank.
Indeed, many other Kenyan businesses with the ambition to scale higher commercial heights have found the going tough in Tanzania.
Last week, Tanzanian authorities threw into disarray KCB’s bid to acquire African Banking Corporation Tanzania (BancABC Tanzania) following what the lender said were delays in approval from regulators.
The planned deal was expected to significantly increase the lender’s balance sheet.
In an earlier interview with The Standard, KCB Group Chief Executive Joshua Oigara had hinted that the reason for the delay in the completion of the deal was due to “shareholder disagreements”.
“It has taken a bit longer. There have been some delays in terms of technical approval and final negotiations between ABC and their own shareholders in Tanzania,” said Mr Oigara.
Sources told Financial Standard that there were disagreements between London Stock Exchange-listed Atlas Mara - the majority shareholder - and the minority shareholder, the Tanzanian government, over the disposal of some of the assets.
Frustrated by the slow pace of the deal, which started in November last year, and given that the agreement had a stop-date that KCB refused to extend, the Nairobi Securities Exchange-listed lender decided to back out.
But this is not surprising. Over the last five years, there has not been any major merger and acquisition by a Kenyan company in Tanzania, according to Kunal Ajmera, the chief operating officer and international business centre director for Eastern Africa at Grant Thornton Kenya, an audit company.
An increase in East African Breweries Ltd’s stake in Serengeti Breweries is the only notable deal in the recent past.
“The only other deals that happened are by private equity firms. They just invest in Tanzania because they have to balance their portfolio,” said Mr Ajmera.
Normally, when foreign money comes into the East Africa Community (EAC), private equity firms are expected to find deals across the trading bloc’s member states.
The acquisition of BancABC would have pushed the profit contribution of KCB’s regional business closer to 20 per cent.
The lender’s subsidiaries outside of Kenya contributed 14 per cent to profit before tax as at December last year. Balance sheet growth would also have seen KCB inch closer to its competitor Equity Bank, which has an asset value of Sh1.2 trillion.
Elijah Munyi, a lecturer of international relations at the United States International University-Africa, reckons KCB has been given a taste of Tanzania’s protectionist policy that pervades nearly all the sectors of the economy.
“I think there was definitely going to be frustrations, even though [President Samia] Suluhu is a bit more open,” said Dr Munyi.
President Suluhu, who replaced the late John Magufuli, has said she is open to foreign investments, especially from Kenya.
The new détente between Kenya and Tanzania was reinforced by Suluhu’s visit to Nairobi in May this year where she promised to open a new bilateral chapter.
Although KCB entered Tanzania more than two decades ago, the performance of KCB Tanzania has been far from impressive.
Instead, the star performers in the group’s stable of subsidiaries have been in South Sudan, Burundi, Rwanda and Uganda.
The South Sudan subsidiary made a profit after tax of Sh789 million last year, Burundi Sh531 million and Rwanda Sh446 million. The Tanzanian unit was the least profitable with a net profit of Sh216 million.
KCB Tanzania had 14 branches and 15 ATMs, supported by 249 agents and 291 staff, by the end of September.
KCB Tanzania was incorporated in Dar es Salaam in 1997, while Equity Bank Tanzania opened its doors in February 2012 with two branches - Quality Centre Dar es Salaam and Arusha.
Thornton Kenya’s Ajmera said in contrast to Tanzania, merger and acquisition deals by Kenyan firms in other EAC countries have largely been smooth.
“It’s a case of willing buyer, willing seller. As simple as that,” he said.
Earlier, KCB had completed the acquisition of another of Atlas Mara’s lenders in Rwanda - Banque Populaire du Rwanda - which saw its assets grow by 15 per cent, or Sh1.12 trillion, in September this year compared to Sh972 billion in the same period last year.
Towards the end of last year, Equity Group became the Democratic Republic of Congo’s biggest foreign bank after completing the acquisition of BCDC, the country’s second-largest lender. In May, I&M Holdings completed the acquisition of Orient Bank from 8 Miles LLP and Morka Holdings at a cost of Sh3.6 billion. Orient Bank is the 12th largest lender in Uganda.
The hallmark of a free market is the ease with which one can own and dispose of property. But with the ABC Tanzania deal flopping, Atlas Mara will be left holding onto assets it desperately wanted to get rid of. Besides Tanzania, Atlas Mara wanted to exit Rwanda, Mozambique and Zambia.
Things have not been any better for Equity Group’s Tanzanian subsidiary.
Equity Tanzania had 14 branches. The subsidiary earned Equity an Sh800 million profit before tax in the nine months ended September, making it the second least profitable subsidiary after South Sudan (Sh30 million).
However, the Tanzanian unit has not been performing well over time. It has been making losses, posting a pre-tax loss of Sh600 million in 2018 and Sh400 million in 2019 and 2020.
Equity Tanzania has assets worth Sh34 billion, Sh22.1 billion in deposits and a Sh19.8 billion loan book.
The Tanzania unit closed September with the highest ratio of non-performing loans (NPLs) - loans that have not been serviced for more than three months - to total loans.
Equity Tanzania’s NPL ratio closed the third quarter ended September at 25.6 per cent compared to the group’s average of 8.9 per cent. The Kenyan unit had an NPL ratio of nine per cent.
A high NPL ratio usually means a bank bears a greater risk of loss if it fails to recover the owed amounts, while a low ratio means the outstanding loans pose a low risk.
For KCB, the Tanzania unit’s asset base stood at Sh39 billion in September, while pre-tax earnings were Sh754 million—a growth from Sh385 million in the preceding similar period.
KCB Tanzania profits rank below Rwanda (Sh927 million) and South Sudan (Sh836 million).
KCB had hoped to acquire BancABC and merge it with KCB Bank Tanzania. This, KCB had said, would integrate KCB Tanzania’s strong retail and corporate banking franchise with BancABC’s retail and commercial banking operations.
KCB Group investment in the Tanzania subsidiary stands at Sh3.55 billion, while that of Equity is Sh6.2 billion.
Trade and diplomatic relations between Nairobi and Dar es Salaam have not always been smooth, with the two countries adopting divergent economic ideologies after gaining independence from the British colonialists.
And despite the two countries being members of the EAC, there has not been free movement of people and capital between the borders.
In 2011, Tanzania banned Brookside, one of the region’s biggest dairy processors, from collecting milk in the country and processing it in Kenya.
Brookside, however, argued that milk production in Tanzania was too low to sustain an investment of $100 million (Sh8 billion) in a processing plant.
Tanzania accused Brookside of going against the 2004 agreement that it would rehabilitate the defunct State-owned Tanzania Dairies – on which it spent about Tsh2 billion (Sh97.8 million) to revamp – and put up an ultra-heat-treated milk processing plant.
Things escalated during the presidency of Magufuli, who had ambitions of growing the country’s industrial base by protecting local firms from external competition, and once ordered the setting ablaze of chicks and auctioning of livestock from Kenya. This put him at loggerheads with his neighbours.
Analysts say that while there is some degree of goodwill from the Suluhu administration, it is going to take some time to mend relations.
“The president has changed, but the old hierarchy and everything else is still intact,” said Ajmera.
Munyi reckoned that as much as there is openness at Tanzania’s top leadership, the country is not going to shed its paranoia about being dominated by Kenya.
“There is that element of domination by Kenyan finance institutions,” he said.
Despite having over a fifth of the branches belonging to Kenyan banks’ subsidiaries, Tanzania’s share of profit before tax by the end of last year was just over 12.5 per cent of Sh9.2 billion.
Our computation does not include gross profits for NCBA and ABC Bank, which also have operations in Tanzania, as the data did not feature in their annual results for the period under review.
For the banks whose data was available - Equity, KCB, I&M and Diamond Trust Bank - the Tanzanian subsidiaries made a profit of Sh1.1 billion.
The most profitable country outside of Kenya for the local banks was Rwanda, where the four banks made a profit of Sh3.5 billion followed by Uganda (Sh2.6 billion) and the Democratic Republic of Congo (Sh1.6 billion).
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