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How small banks felled giants to become market leaders

KENYA @ 50
By By JEVANS NYABIAGE | December 11th 2013


KENYA: In the nine months to September 2013, indigenous banks overtook their multinational rivals in profit growth.

Barclays Bank of Kenya announced a 10.2 per cent drop in profits while Standard Chartered Bank increased at the slow rate of 5.7 per cent. Co-operative Bank led the top tier lenders with a 17.4 per cent rise in net profit, followed by KCB’s 16.3 per cent and Equity Bank’s 7.2 per cent.

It has been a struggle for indigenous banks to achieve this.  In the past five decades, the growth of banks in Kenya has been characterised by turbulent periods: Collapses, liquidity crunches and political interference. For many years, the small local banks indigenous banks have been in financial distress.

In the nine months to September, KCB held onto its position as Kenya’s most profitable bank with net earnings of Sh10.8 billion, while Equity recorded Sh8.9 billion, Co-operative Bank (Sh6.94 billion), Stanchart (Sh6.8 billion) and Barclays (Sh5.6 billion).

A few banks such as Standard Chartered and Barclays had dominated the local banking industry for decades. But the reign of Barclays Bank ended in 2011, when its Sh8 billion net profit was overtaken by KCB’s Sh10.9 billion.

A recent documentary done by the banking industry lobby, the Kenya Bankers Association (KBA) says in the late 1970S, seven new African-owned banks and 33 non-bank financial institutions came up to join the single private indigenous bank – Co-op Bank. The main characteristic of these new banks and financial institutions was that they were small in terms of start-up capital. 

In 1980, the minimum capital required to establish a bank was Sh2 million and that of non-banking financial institutions was Sh500,000.  But as the new banks started experiencing cash flow and other problems, the Central Bank raised the requirements for start-up capital. By 1982 it was Sh5 million and by the end of the decade it had increased to Sh15 million.

KBA says not even increasing the capital based helped these banks stay afloat. The banks’ books became weak, shaky and a liquidity crisis set in. At the time, the Central Bank lacked adequate capacity to regulate this highly politicised sector. Twelve banks collapsed between 1984 and 1989.

Due to these collapses, the Government was forced to pass the Banking Act 1989, which tightened requirements for the licensing of new banks and non-banking financial institutions. The Deposit Protection Fund Board was set up to protect and compensate depositors when banks collapsed.

The same year, the Government amalgamated nine of the collapsed banks to form Consolidated Bank of Kenya. The banks that were merged were Union Bank, Jimba Credit Corporation, Estate Finance, Estate Building Society, Business Finance, Nationwide Finance, Kenya Savings and Mortgages, Home Savings and Mortgages and Citizens Building Society.

KBA says that despite tight regulation, there was a second wave of collapses between 1993 and 1995 affecting19 banks, most of them linked to the infamous Goldenberg scandal of the early 1990s.

In 1998, there was a third wave of collapse of banks such as Bullion Bank, Fortune Finance, Trust Bank, City Finance Bank, Reliance Bank and Prudential Bank.  And between 2000 and 2005, five more banks and non-banking financial institutions collapsed.

But it is in the current decade that the industry has registered the highest growth, mainly driven by the move by some banks to tap into the bottom of the pyramid, the low-income class and informal or jua kali sectors.

Before then, the sector was in the hands of rigid banks that had held consumers to ransom. Some had blacklisted customers who could not maintain minimum balances of about Sh10,000.

Equity Bank, established as the Equity Building Society in 1984, which also had financial difficulty in surviving the market, would later redefine the industry. The bank welcomed the masses who had been ignored by more developed banks, mostly foreign-owned.

Now the bank is the market leader in terms of account holders and innovative products and services targeting Kenyans in the lower-middle and low-income classes. For the foreign-owned banks, the market that they had previously shunned is the one they have been slowly making a beehive for, but the damage had already been done.

For decades multinationals such as Barclays and Standard Chartered dominated Kenya’s banking sector by focusing almost exclusively on the middle and upper classes. Equity went the opposite way. It targeted the unbanked poor – ‘the watchmen, grocery sellers and small-scale farmers’. This is the category that Equity listed as typical customers — with cheap savings accounts and microloans backed by unusual guarantees.

The strategy has proved remarkably successful. In just a few years, Equity has gone from being a quirky, fringe player to one of the most profitable banks in the country and a leading player on the Nairobi Stock Exchange.

Equity Bank’s strategy forced the multinational banks to change their business strategies. Kinstitutions, helped by tight regulation from the Central Bank.

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