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Corporate Case Study

Why banks must rethink their business models

Trends in the banking industry that are bound to change the landscape


Kenya’s banks will have to bolster their operations and seek more efficiency in the remaining part of this year to fight over growth pressures due to rising economic and regulatory challenges. Latest industry data shows that the banking sector had a slower growth compared to a similar period last year, largely due to subdued expansion of funded income segment. Funded income across the industry continues to record relatively slower growth, affected by the declining yields in both loans and government securities.

Additionally, as the interest rate cap law remains in place, banks are expected to continue posting relatively low credit extension, with private sector credit growth seen remaining below five per cent into the next year as banks skew their asset allocation in government securities that yield higher risk-adjusted returns.

Banking experts and independent analysts said the future for the banks looks bleak arguing that the interest rate cap has not achieved its intended objectives of easing the access to credit and reducing the cost of credit, and thus needs to be repealed. This would effectively spur economic growth, as MSMEs that have continued to struggle access the much-needed credit.

Medium-term future for banks 

What is on the cards for the industry? According to Cytonn investments, banks will look to manage the industry-wide deteriorating asset quality. This will involve further tightening of credit standards as banks cherry pick low risk credit consumers and increase focus on secured, collateral-based lending. In the current regime of compressed interest margins focus on Non-Funded Income (NFI) is likely to continue, as banks aim to grow transactional income through agency banking, internet and mobile technologies.

“Cost containment is likely to continue being a focus area. We thus expect continued restructuring, possible leading to staff layoffs, as staff headcount demands reduce, on increased usage of mobile and internet channels,” said analysts at Cytonn in a research note published in June. With increased emphasis on anti-money laundering and fraudulent transactions, banks are also expected to be keener on streamlining their operational processes and procedures in line with global standards and regulatory bodies. 

Consolidation and regional expansion

The banking sector has recently been home to consolidation activity as players in the sector are either acquired or merged, leading to formation of relatively larger, well capitalised and possibly more stable entities. KCB Group in April issued its proposal to acquire 100 per cent of all the ordinary shares of National Bank of Kenya (NBK) through a share swap of 1 ordinary share of KCB for every 10 NBK shares. The transaction will create the largest bank by assets in East Africa.

In January 2019, NIC Group and Commercial Bank of Africa (CBA) signed their agreement to a proposed merger between the two banks that was first announced in December. Regional expansion too remains a top theme for the sector as Kenyan banks grow their operations into neighbouring countries in search for growth, to diversify their earnings as competition intensifies in the local market. This is to rig fence profitability which is largely at risk for most of the lenders under the current interest cap regime. 

Late June, Equity Group said it had opened a commercial representative office in Addis Ababa, Ethiopia, which was set to commence operations in July. This, said the Group CEO and MD James Mwangi, is in line with the bank’s strategy to expand into 10 African countries within the year. Expansion into the Ethiopian market is the first phase of the regional expansion drive to attain Pan African status, said the Bank which now joins KCB Group in the Ethiopia foray. With a strong retail and digital banking expertise, the Ethiopian market presents a vast untapped market for the two largest banks to exploit, with an estimated population of 105.0 million. “The ongoing shift in reforms to more liberal policies by the current regime should see more banks venture into the country,” said Cytonn.

Stringent regulatory environment

Regulation remained a key aspect that affected the banking sector, with the regulatory environment evolving and becoming increasingly stringent. Key changes in the regulatory environment have been the introduction of the Banking Sector Charter, sponsored by the Central Bank of Kenya. This is to guide service provision in the sector. The Charter which came into effect in March 2019, aims to instil discipline in the banking sector to make it responsive to the needs of the banked population. It is expected to facilitate a market-driven transformation of the Kenyan banking sector, thereby considerably improving the quality of service provided, as well as increase the access to affordable financial services for the unbanked and under-served population. The impending implementation of the charter will likely introduce risk-based credit scoring, which requires banks to extend credit based on their credit scores, as determined by licensed credit reference bureaus.

The interest rate cap remains a thorn in the flesh for the sector. Early this year, the High Court suspended the Banking (Amendment) Act 2015 for one year, terming it as unconstitutional. Treasury Cabinet Secretary Henry Rotich in his budget speech in June said he is keen to repeal the Act, citing that since its enactment, the law has failed to meet its objective of improved credit access, especially to MSMEs.

Peter Mwaura is a freelance journalist based in Nairobi. Email:

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