Business
Kenyan banks, awash with cash, looking to expand beyond East Africa
Cash-rich Kenyan banks are increasingly looking at entering new markets outside East Africa and compete with Nigerian and South African lenders for control of the continent’s banking sector.
Co-operative Bank and DTB are the latest Kenyan lenders to announce plans to venture outside East Africa as they seek to grow earnings amid increased competition at home.
The Co-operative Bank, which launched operations in South Sudan last year, said it was targeting the Ethiopian and Ugandan markets, while DTB said it has its sights on Malawi and Mozambique. The move is driven by growing balance sheets resulting from increased capital sizes, a maturing market and growing shareholders’ pressure to boost earnings.
Ernst and Young estimates that for every US$1 in gross domestic product (GDP), the country’s lenders hold US$0.6 of banking assets. In Tanzania, Uganda and Rwanda, the figure stands at US$0.3, US$0.2 and US$0.12 respectively.
The shift to markets outside the East African Community will put Kenyan banks in direct competition with South African and Nigerian lenders, who on average, have more capital. For example, the local units of Stanbic and Barclays Bank each have larger capital base than Kenya’s top 5 banks combined.
But where Kenya lacks for capital, it makes up for in experience. Whereas South African banks are big on large corporate and large ticket financing, Kenyan banks have experience in the retail market, a factor that could help them grow their units in markets such as Malawi.
“The key is to focus on the retail end – the South Africans focus to a large extent on corporate deals – also, given that a sizeable number of their existing clients will have businesses in these markets, East African banks can look at servicing them,” said Kuria Kamau, an analyst at Kestel Capital.
The experience of using technology to increase access to the un-banked could be especially crucial. Top Kenyan lenders like the Equity Bank, the Kenya Commercial Band and Co-operative Bank now allow their customers to open, save and borrow money through their phones without having to physically visit branches.
“Lessons learnt from launching these mobile-based products can prove a key differentiator as can partnerships like the Equity Bank and Airtel one. These can make them more competitive in the retail space,” said Kamau.
But replicating the success in new markets like Malawi could prove a challenge. According to a Finscope survey on the Malawi banking sector, 80 percent of the Malawian population is unaware of mobile money and out of the remaining 20 percent who are aware, only 22 percent use the service.
In Kenya, 80 percent of the population is registered with mobile money services, while mobile phone penetration in Malawi is at approximately 30 percent.
The uses of alternative delivery channels are also important in reducing the cost to income ratio and growing customer satisfaction.
For example, more than a third of all banking transactions done by the Kenya Commercial Bank, the Co-operative Bank and Equity Bank are through either agency or mobile banking, with the former putting the figure at 50 percent.
However, there are numerous challenges. Southern African companies have struggled to break into the Kenyan markets, a factor that has largely been blamed on the different management cultures in the 2 countries, while Nigerian banks operating in Kenya continue to struggle.
“The key to a business entering new markets is to try to be as local as possible – in terms of things like whom you hire. You also have to build genuine relations with employees, government and supplies,” said Philip Kinisu, the former chairman of PriceWaterhouseCoopers Sub-Saharan Africa.
“Also, it is important to always remember that just because it worked in one of your markets does not necessarily mean it will work in another market,” added Kinisu.
But even as Kenyan banks look to venture outside the region, analysts say they will need to refine their strategy given their relatively limited success in the East African market.
While the regional market remains under-banked, less than 40 percent of Tanzanians and slightly above 40 percent of Ugandans have access to formal banking – Kenyan lenders have struggled to grow their industry market and profit share.
Four of the nine Kenyan banks operating in Uganda reported losses. The banks that found the going tough included National Industrial Credit, Commercial Bank of Africa, Bank of Africa and Imperial while Kenya Commercial Bank, Equity Bank, DTB, ABC and Guaranty Bank, formerly Fina Bank, all made profits.
Overall, the 11 Kenyan banks with subsidiaries outside the country made a pre-tax profit of US$59 million in the year to December 2013, compared with US$58 million in the same period in 2012.
Part of the reason is the concentration in the region’s banking sector. For example, in Tanzania, the CRDB Bank and NMB bank control over 40 percent of the country’s banking assets. In Malawi, Standard Bank and National Bank control 52 percent of the country’s banking assets.
The banks will also have to prepare for volatile country and regulatory risks. For example, according to data from the Malawi Reserve Bank, the average lending rate in the country was 37.13 percent in March, compared with an average of 19 percent in the region. The country’s high lending rate has pushed non-performing loans to 15 percent.
Moreover, the Malawi kwacha has been volatile, shedding 10 percent of its value in the 6 months to March.
But despite the risks in these new frontier markets, there is immense opportunity. For example, the Malawi Reserve Bank puts the return on assets in the Malawian banking sector at 5.3 in 2013. The 2013 return on assets for Kenyan, Uganda, Tanzanian and Rwandan banks stood at 3.5, 2.6, 1.6 and 1.2 per cent respectively.
Republished from The East African