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Consolidation boosting banking sector's operational resilience

By Joshua Oigara | May 13th 2022 | 3 min read
KCB Group Chief Executive Officer Joshua Oigara. [Wilberforce Okwiri, Standard]

During my recent visit to Rwanda, in our discussions with President Paul Kagame, it became clear that African banks must play a leading role in making societies more resilient and more responsive to the needs of the public.

Essentially, we must reposition the banking and finance industry as a catalyst for economic recovery, inclusive growth, and transformation. This starts with banks with scale to finance key sectors of the economy.

The post-Covid landscape for the financial sector has been about finding the right balance. Banks, especially, are now navigating not only an economy in recession, but one where Covid-19 is disrupting business models and accelerating existing trends such as digitalisation and the importance of environmental, social and governance factors.

Simultaneously, there has been an increased investment in technology and greater consolidation in the industry. In banking, the scale has always been a key driver of value, but it is now more critical than ever due to the need to invest in technology and digital capabilities to emerging consumer trends and regulatory requirements.

The need to gain financial strength through consolidation informed KCB Group's acquisition of Banque Populaire du Rwanda  (BPR). We have since combined KCB Bank Rwanda and BPR operations to establish the second largest bank in Rwanda.

We are now better positioned to play a critical role in supporting the economy by focusing on inclusive growth, regional trade, economic opportunities, money management, investment initiatives, raising living standards, and poverty reduction.

Across the world, the banking sector market landscape has rapidly changed over the past two years. From inclination for incremental change and cautious experimentation to a faster digital metabolism.

Today, banks are evolving their prioritisation from a historically regulatory-response strategy to a more proactive, strategic-growth plan, focusing on enhancing efficiency, meeting emerging customer needs, and responding to changing market dynamics.

Globally, S&P Global Market Intelligence reports that merger and acquisitions activities will continue at an unprecedented level this year in banking and beyond. According to the report, there were more than $2.5 trillion of deals announced and the combined deal value M&A activities in the US bank mergers grew to more than $61 billion at the close of November.

Consolidation of the banking industry has become an economic necessity in the 21st Century. Globally, small to medium-sized banks face chronic asset quality problems which constrain their capital availability, casting doubt on their scalability and business sustainability.

On the other hand, larger financial institutions have proven to be better suited to insulate asset quality stresses that would otherwise result in the liquidation of small and medium-sized banks, causing major disruption within the local financial sector.

Through consolidation, the operational resilience of a banking sector is enhanced as lenders benefit from economies of scale. As a result, the income stability of the regional banking sector is enhanced due to the ability of larger banks to establish a more comprehensive geographical presence, with more significant investments in product diversification and process efficiency.

Consolidation of the Nigerian banking sector in 2005 resulted in 25 banks emerging from the original 89 that existed before the exercise. The fewer, stronger banks demonstrated the potential for the industry to drive Nigeria's economic growth agenda through credit operations, as larger institutions have been able to sustain significant increases in loans and advances to economic agents.

In India, challenges related to corporate governance and the ability to raise adequate capital culminated in a 2019 ministerial decision to merge 10 smaller public sector banks into four in a bid to create fewer and stronger global-sized lenders.

On the African continent, the key driving factor for bank consolidation in the 2020s has been the prevailing economic recession and slow recovery emanating from the Covid pandemic and the ongoing war in Ukraine. The precarious state of the financial sector across Africa has propelled financial lenders and regulators alike to increasingly consider consolidation to improve the financial sector's operational resilience.

Furthermore, a densely populated banking environment increases the strain on regulators to ensure compliance, often resulting in small to medium banks engaging in malpractice as regulators focus compliance efforts on the larger banks in the market. Consolidation reduces the compliance burden of the regulators, ensuring a healthier and more stable banking environment.

The inception of the African Continental Free Trade Area has provided the optimum backdrop for banks to support customers and businesses across the continent

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