Hold your horses, analysts tell banks on EAC expansion

Banks with a regional presence are seeing the deepening of integration in the East African Community (EAC) as presenting good business prospects though analysts warn rapid branch expansion could haunt the institutions.

The Community has kicked off the process of setting up a seamless common market just months after establishing a customs union, setting the stage for enhanced commercial activity that banks seek to ride on.

United Bank for Africa, for instance, is investing about Sh4 billion this year to set up more branches and expand its loan book in the 17 branches in Uganda, Tanzania, and Kenya.

Managing director, Manz Denga, said UBA is keen on two areas.

“We see a great opportunity in financing big ticket infrastructure projects, including the oil industry that is coming up in Uganda,” he said.

Analysts say opening up of the region comes with multi-billion shilling infrastructural projects like roads linking the countries.

Mr Denga added that a regional presence gives banks an edge in issuing letters of credit (guarantees of paying exporters in international trade).

“Previously, securing a letter of credit involved going through banks operating out of Africa, a process that costs one per cent to two per cent of the transaction value and lasting up to 48 hours. We see our regionally available letters of credit as competitive by costing 0.25 per cent of the transaction value and taking six hours to complete.”

Ecobank seeks to ride on the deepening integration to boost its Pan-African banking model, serving regional corporates, development agencies like the United Nations, and small and medium sized firms.

Michael Monari, the executive director of the bank, said with presence in all the EAC member states, Ecobank can exploit the opportunities arising from free movement of goods and services in the same way it has done in West Africa under the Economic Community of West African States (Ecowas).

Last month, the bank introduced a rapid money transfer system that processes transactions instantly, similar to local transfers.

The service is targeted at African expatriates working in countries where the bank has a presence.

KCB Bank, currently raising Sh15.5 billion through a rights issue, plans to use part of the money to finance a further expansion into the region.

Last year, KCB established 34 new branches and over 100 new auto teller machines (ATMs), bringing its total branches and ATMs to 203 and 325 in the region respectively.

The regional footprint of banks like KCB and Equity is likely to boost their competitiveness in the race for deposits and transactions from new businesses launching operations across the region.

“There is a clear advantage for retail banks operating in the EAC market,” said Eric Musau, a financial analyst, adding that the expansion comes at a high cost — a huge capital base.

Mr Musau said that in light of the EAC integration, small banks with national operations will need to further sharpen their focus to continue serving their niche markets.

David Mataen, the head of research at Faida Investment Bank, sees culture as the biggest threat to banks expanding in the region.

Tricky matter

He says the EAC integration is driven by economic considerations but market acceptance remains a tricky matter as the different nationals are still full of suspicion and prejudice.

Because of this, he reckons that banks that can identify opportunities that can ride above the prejudices are best placed to reap from increased intra-regional commercial activities, citing merchant banks as an example.

He says that failure to properly assess the risk in the region can be a fundamental mistake.

The loss of Sh309 million by Equity Bank from its operations in Uganda and Sudan last year is seen as a signal of the challenges that face expanding banks.