The Central Bank of Kenya recently released its latest edition of the banking supervision report shedding light on the country's fast-changing financial services sector.
The report notes that commercial banks in Kenya continue to invest billions of shillings in resources towards digital transformation with profitable outcomes.
The value of total deposits held by commercial banks rose 9 percent from Sh4.6 trillion in 2021 to Sh5 trillion last year which has been attributed to the mobilisation of funds through digital platforms.
On the other hand, microfinance banks reported a Sh200 million loss in income cumulatively largely on the back of competition from digital lenders.
According to the CBK, the majority of commercial banks in Kenya consider themselves as either better banks (institutions that leverage fintech to digitise operations) or as distributed banks (institutions that partner with fintech start-ups to digitise operations).
More than 85 percent of the banks surveyed indicated that these two strategic outlooks inform their digital transformation journeys.
Among commercial banks, payments, clearing and settlement services are priority areas for digitisation while the majority of microfinance banks consider credit, deposit and capital-raising services as top on the agenda for innovation.
The CBK report however indicates that commercial banks are still putting money into brick-and-mortar as well as hiring more personnel.
The number of bank branches increased by 1 percent from 1,459 in 2021 to 1,475 last year with 30 new bank branches opened last year and 14 closed down.
Staff numbers grew 11 percent from 32,440 in December 2021 to 36,107 last year with the increase attributed to large banks recruiting additional sales and payment channels support staff.
The biggest increase in employee numbers was recorded in secretarial and other staff followed by clerical staff.
The data illustrated trends that experts have long stressed regarding the impact that digital transformation will have in one of the country's most dynamic economic sectors.
The increase in bank branches, albeit marginal, indicates that despite the growth of digital platforms to access banking services, a big portion of customers still opts to go physically to banking halls for some services.
In addition to this, higher staff numbers, particularly in clerical, secretarial and other support departments, indicate that banks still require human intervention to augment the powerful digital and analytic systems that power much of the sector.
This means that the digital transformation of the country's banking sector remains a complex and fairly long-term process whose result will be the emergence of new jobs and roles, as much as it will disrupt some traditional functions.
A recent report by McKinsey indicates that the return on investment in Africa's five biggest banking markets; Egypt, Kenya, Morocco, Nigeria and South Africa, has been on a steady decline over the past seven years.
Some of the reasons advanced by this drop in profitability are a reduction in net interest incomes due to the prevailing rates, a decline in fee margins due to competition and digitisation and operating costs that have remained constant, and in some cases increased.
According to McKinsey, banks in most African markets have high cost-to-income ratios, along with low banking penetration compared to banks in benchmark emerging markets.
The economic think tank states that African banks cost almost twice as much to run and the profitability challenges facing the sector are likely to persist into the near-term.
This means that commercial banks and microfinance institutions in Kenya need to carefully review their digital strategies and how these are deployed to have a meaningful impact on operations and their bottom line.
One study on commercial banks in East Africa released last year by Deloitte recommended that banks should strive for more agility and resilience in the face of the ever-present uncertainties that have beset the global economy in the last three years.
This can be achieved through empowering front-line staff with more decision-making authority by creating flatter team structures and reviewing responsibilities.
Tools such as enterprise resource planning (ERP) systems should also be optimized with adequate resources to achieve better cost transparency and analytical insights to inform new products and services.
The sector also has a lot of work to do in terms of reskilling the human resource and ensuring that staff are deployed efficiently to complement technological systems, rather than serve parallel functions that increase operational costs.
This is however not a one-time effort. Despite the hype and doom scenarios that accompany the conversations about the role of technology such as artificial intelligence (AI) in the banking sector, the recent trends indicate that this disruption is likely to be a protracted marathon, rather than a sprint to the finish line.
Mr Magu is the CEO, of Maudhui House, a public affairs consultancy. [email protected]