Why Kenya needs a fair mix of private and public banks

Following the recent regulatory approval for KCB Group to take over the National Bank of Kenya, one of Kenya’s only three public banks is now set to be transferred into private ownership.

This also comes at a time when there is increased consolidation in the banking sector. The irresistible conclusion within policy circles is that, with 40 banks, Kenya has more banks than its much larger peers South Africa and Nigeria.

However, the demand for credit in Kenya has remained extremely high, and far more than the available supply.

The fact that Kenyans are willing to borrow from mobile loan applications, at annual percentage rates of 72 per cent, shows that the demand for credit is perfectly inelastic and that Kenyans are willing to access credit at any price.

This points to a supply-side constraint and therefore the question begs — does Kenya need fewer banks or more?

A closer look at the statistics might yield better insights. The average Return on Equity in the banking sector is quite high at well over 20 per cent and in some banks, it is over 30 per cent, making it a lucrative investment sector.

In a free-market economy, this should attract more investors to enter the market until a natural market equilibrium is attained. This is exactly what happened in 2017 when the Central Bank of Kenya (CBK) lifted a freeze on the licensing of new lenders.

About nine banks expressed interest to enter the Kenyan market. However, little has been said on the status of their application.

Secondly, while there has been remarkable growth of private banks, there has been little focus on developing public banks, which have the potential to unleash immense growth across the country.

In her book The Public Bank Solution: From Austerity to Prosperity, Ellen Brown highlights the benefits of public banks operated as public utilities and returning their profits to the public.

In China, state-owned banks have been the engine that funded the infrastructure development, lifting the country from poverty to super-power status. It’s little wonder that the Industrial and Commercial Bank of China, the China Construction Bank Corporation and the Agriculture Bank of China are the three largest banks in the world.

In Kenya, this model would particularly benefit neglected sectors such as agriculture, which currently receive only one per cent of total bank loans.

The main challenge in Kenya is that, while it might seem that the country has numerous banks on paper, the reality is that most banking activities are highly concentrated around the capital city.

Indeed, over 50 per cent of Kenya’s combined bank branch network is in Nairobi and thereby making the circulation of money highly lopsided in favour of Nairobi and its environs.

Such a situation fuels the high migration of young Kenyans from their rural homes to Nairobi, because in their assessment, money can only be found in the capital city.

The natural result is the creation of sprawling slums due to the exponential increase in demand for low-cost housing.

To ensure that money supply is well distributed across the country and not just in Nairobi, policy makers should consider studying the United States model.

One of the brilliant models adopted by the Americans is that the regulating central bank — the Federal Reserve — is devolved into 12 regional Federal Banks located in cities throughout the nation, regulating and overseeing banking activities.

This ensures there is enough research, focus and intervention in every corner of the country. This has contributed to a vibrant banking sector with over 4,605 registered commercial banks!

In Kenya, it is encouraging to see that the 47 counties have started organising themselves into regional economic blocs such as the North Rift Economic Bloc or the Lake Region Economic Bloc.

The next step should be on how they can partner with the government to create structures that can support vibrant economic hubs.

The vision of the Lake Region Economic Bloc of forming a regional bank is brilliant and can be a genuine catalyst for growth. It is unfortunate that the Treasury poured cold water on this plan at its infant stage. Perhaps a better approach would have been to explore the model and compare how other countries have successfully implemented it.

A dynamic mix of private and public banks, evenly spread out across the entire country, will ensure that there is a wholesome circulation of money.

Entrepreneurs will have enough access to capital needed to expand their businesses, which in turn will lead to a faster pace of job creation and a reduction in the unemployment rate.

Gichinga is Chief Economist at Mentoria Economics. @kgichinga