Governors must drop bid to buy bank

The latest on the plans by governors from the lake region to establish a bank is that they are planning to purchase the State-owned Consolidated Bank of Kenya, which has been put on the auction block by its owners.

My view is that the governors have taken the wrong route. Instead of buying a commercial bank, what the lake region needs is a regional development bank with capacity to lend long-term money. As I have argued in this column before, commercial banks are by definition and design crafted to lend short -term money.

This is because the deposits they mobilise from their customers are basically short-term in nature. In other words, they don’t do developmental lending and are by design meant to give short-term facilities such as overdrafts. A commercial bank that tries to lend long term from the short money it holds on behalf of its customers will find itself guilty of committing asset mismatches.

Secondly, prudence forces commercial banks to spread risks by lending broadly across sectors, clients and regions. A bank that plans to lend to one region will sooner or later fall into the problem of risk concentration. In most cases, a well-managed and prudent commercial bank will seek to lend beyond regions, locations and sectors. You cannot concentrate lending activity in the lake region merely because you are owned by county governments within that regional economic bloc.

Then there is the fact that an existing commercial bank such as Consolidated Bank of Kenya operates under a licence with specific conditions. You may find that some of the licence conditions of an existing bank - such as Consolidated Bank- are not in tune with the development objectives the governors of the lake region are trying to achieve.

In any event- and even if the 14 counties were mobilised to fork out the capital, the amounts involved may be enough to purchase a bank of the size of the Consolidated Bank of Kenya.

In commercial banking, the size of your capital has implications on your single borrower limits and on parameters such as core capital to deposits ratios.

Thus, in terms of scale, the Consolidated Bank of Kenya may not make the impact the governors of the lake region desire. Instead of buying a commercial bank, why don’t the governors of the lake region consider establishing a regional Development Financial Institution (DFI).

Clearly, a development bank funded mainly by shareholder capital – in the image of the East African Development Bank or even the African Development Bank is what is more appropriate for the region. What the region should be looking for is a financial institution with capacity to access capital markets by issuing long-term bonds.

A development bank funded by capital contributions from the county governments will be best suited for the developmental role the governors of the lake region are thinking about. Why are they trying to spend money to duplicate what already exists? Indeed, most of the existing 42 banks in Kenya already have multiple branches within the lake region.

From a commercial bank perspective, the lake region is overbanked. A development bank makes much more sense because the long-term lending space in Kenya has very few viable players. In truth, the long-term lending sector in this country has been on its knees for many years.

The institutions that the government established in the 1960s and 70s to do developmental lending and to give businesses long-term money - the likes of the Industrial Development Bank, Kenya Industrial Estates, Kenya Tourist and Development Corporation no longer function. In fact, most of the development banks in Kenya are in different stages of being prepared for privatisation. So, why not jump in and fill the gap that the troubled state owned development banks have left? Buying Consolidated Bank of Kenya- an insolvent bank with no capital - does not make sense even if it was being offered to you cheaply.