Ideas & Debate

Why Kenya still attracts more banks despite tightened rules


It’s almost inconceivable opening a bank account without the option of digital interactions. FILE PHOTO | NMG

Kenya is still likely to attract more banks, especially global names, despite the Banking (Amendment) Act, 2016.

Just early last week, Central Bank of Kenya (CBK) disclosed intention to finalise the processing of licence applications for Dubai Islamic Bank and Mayfair Bank, two institutions that had already been granted an “approval in principle”—the former being the largest Islamic bank in the United Arab Emirates (UAE) by assets.

In November 2016, SBM Holdings Ltd, Mauritius’ second largest bank by assets, disclosed intention to acquire Fidelity Bank.

The Banking (Amendment) Act, 2016, which has literally transformed the banking sector into a closed-cube environment (by virtue of risk-pricing caps and deposit floors), has been largely designated, by different quarters, as investment-negative for the sector.

However, despite the closed-cube environment, the sector for a couple of reasons is still likely to attract new players.

First, the fact that mobile phone is driving financial inclusion de-elevates part of set-up costs, especially for new entrants keen on mass-market banking.

It’s totally different case for new entrants focusing on wholesale banking. There is no doubt that Kenya remains a global innovation hub for mobile financial services.

Mobile wallets such as M-Pesa have now created plug-in economy—allowing commercial banks to easily plug in and roll-out innovative branchless banking products as well as allowing customers to manipulate their bank accounts remotely.

It’s almost inconceivable opening a bank account without the option of signing up to digital interactions. And if your bank is not offering you digital access to your account, consider migrating elsewhere.

We are in 2017. As part of adjustments to the Banking (Amendment) Act 2016, banks have to be extremely efficient and I can’t see any other way other than digitisation of distribution.

Second, the cost of regulation in Kenya is still relatively low—compared to markets such as South Africa and Nigeria. For a start, you only need Sh1 billion to get hold of a licence.

Additionally, the regulatory environment still draws most of its prudential guidelines from Basel II—which means no those tough domestic ring-fencing rules, no elevated balance buffers against those complex derivatives whose underlying assets are loosely cobbled together sub-prime assets; and no thickly reinforced firewall between core commercial operations and risky trading activities.

Third, Kenya’s accomodative capital account regulations offer immense capital passporting opportunities for new entrants seeking to play the region.

Essentially, by setting up shop in Kenya, a bank can easily externalise its balance sheet across the region. The EAC region is still considered to be the continent’s largest intra-trader, hence offers a lot of trade financing opportunities.

Fourth, Kenya’s market is niche-driven, and we often talk of niche leaders rather than market leaders. This allows a new entrant to shoot trade into a specific target market where its core strength lies, avoiding broad market’s elevated costs.

Finally, the upcoming commercialisation of oil find will also attract larger balance sheets given the heavy upstream financing. Effectively, barring extreme regulations, I still expect to see new players.