Ideas & Debate

Why banking sector is teetering on the edge of an upheaval

It’s been over a month since the interest rates capping bill became law and I’m sure you’re pretty fed up of reading fairly opinionated analyses of what will go wrong.

So I won’t write about it anymore for now — where for now is defined as five seconds. I can’t help myself since the topic presents such a wide variety of angles to review it from. One such angle is what the potential change to the banking landscape will be.

At the risk of sounding repetitive, the clear winner in all of this will be fintechs and any bank worth its strategic salt will either be hunting to buy one or will have set up a team in a building far, far away from their head office where the members cannot be tainted by the unimaginative, staid and humdrum life of regular bankers.

However, it would be remarkably unfair not to recognise the innovation that many non-traditional players in the financial deepening space have brought to the banking industry.

A case in point is the famous tale of the British government’s Department for International Development (DfID) grant to Vodafone that led to the development of M-Pesa in Kenya which has spun off a completely unexpected industry of mobile based banking. The numbers, as always, tell the story.


Table 1 is an extract from the Central Bank of Kenya’s 2015 Banking Supervision Report. A little history is useful. In the sunset years of the 90s, Kenya was in the throes of the Daniel Moi administration and very tough economic times.

A number of banks undertook massive staff retrenchments which you can see in the 2002 numbers, where staff numbers dropped by about 34 per cent from six years earlier in 1996, yet deposit accounts grew by 68 per cent in the same period, which speaks to technology upgrades and business process improvements within the banking sector which reduced the need for human labour.

On the face of it, as deposits have grown by a factor of 35 times in the 19 years between 1996 and 2015, banks have become extremely efficient through less brick and mortar and more technology as the staff efficiency score has grown by a factor of 16.

The most phenomenal growth has occurred in the last 10 years, since 2006.

Table 2, also sourced from the CBK banking supervision reports, demonstrates the phenomenal growth accelerator that mobile telephony has caused in opening of bank deposit accounts.

Before the launch of CBA’s M-Shwari in November 2012, Equity Bank had the single largest physical deposit accounts in the country at about seven million or about 45 per cent of the total deposit accounts in Kenya, according to the CBK Banking Supervision Report 2012.

Different mindset

Since M-Shwari was launched at the end of November, and had the explosive result of opening a million accounts within 30 days, it can be assumed that CBA has moved from about 64,000 accounts before M-Shwari to 12.9 million accounts as at December 2015 primarily due to this virtual platform without any exponential growth in its branch expansion.

With the 2015 launch of Equitel by Equity, and KCB M-Pesa by KCB, the three banks are now poised to enter the 21st century’s big data innovation pool.

Virtual accounts are data rich as they provide real time consumer behaviour which, coupled with non-banking data analytic teams, can and will generate a completely different lending mindset in these three banks.

I can’t say it enough: the data analytic teams should not have a single banker amongst them otherwise the traditional banking mold will infect any innovation that tries to emerge.

A large part of a bank’s costs are driven by its operating model and the interest rate capping law will force a fundamental strain in the operations of many banks due to the significant margin shrinkage between cost of deposits and price of loans.

The business process re-engineering that happened in the sunset years of the 90s, and which led to the massive retrenchments, will sadly have to happen again.

The efficiency numbers as evidenced in Table 1 will increase, but primarily on the back of virtual banking platforms and the unfortunate closure of brick and mortar branches.

The ultimate winner is the banking consumer in Kenya as virtual platforms lead to lower operating costs that should lead to lower bank charges.

[email protected]; Twitter: @carolmusyoka