Growth requires strong banks

Why has the Central Bank of Kenya lifted a moratorium on licensing of new commercial banks that has been in place since November 2015?

Who is this investor pressing hard for a licence to start a commercial bank when it is an open secret in the marketplace right now that many existing banks are looking for buyers? Why not acquire an existing bank?

These were the questions on my mind when I first heard the news that the moratorium on incensing new banks will be removed with effect from July 1. We have too many commercial banks in this country. Indeed, opinion in the market has all along been unanimous that the priority for policymakers in this sector should be consolidation.

At a time when what the economy needs most is growth supported with affordable credit and long-term money, our banking system is too focused on funding consumption and circulating existing wealth between mature businesses.

The trend in global best practice in emerging markets, including South Africa, Chile and Malaysia, is consolidation into a few strong banks. South Africa, which has a much larger economy than ours, has less than 10 commercial banks.

Our banking system has never been riper for consolidation. But compounding the situation is the problem of market fragmentation. The big banks just don’t offer credit lines to the smaller banks. We saw what happened during the Safaricom IPO that caused nearly all liquidity to move to the receiving bank. The small banks with no credit lines with the big banks faced crippling problems. The scramble for the Central Bank of Kenya’s lender of last resort window for liquidity support by these small banks was huge.

Central Bank of Kenya

 But I am still willing to give Central Bank of Kenya Governor Kamau Thugge the benefit of the doubt because it seems to me that what he is doing amounts to achieving bank consolidation without creating a public furore about it. 

The main tool for effecting policy-based consolidation of the banking sector is raising the minimum capitalisation requirements for banks, even though it is not politically palatable. In 2016. Former Cabinet Secretary Henry Rotich announced that minimum capitalisation requirements for commercial banks would go up. We did not hear about it again.

 From the fine print announcing the lifting of the moratorium were the following words: “New entrants will be required to demonstrate that they can raise Sh10 billion in capital.” It is about consolidating the sector by making ownership of banks an expensive affair. When banks are well capitalised and when they acquire scale and size, you improve their capacity to provide long-terms loans.

We must not forget that the lifting of the moratorium has come on the back of another announcement by the Central Bank, indicating an intention to increase annual licence fees by 0.6 per cent of gross annual revenues. The current fees were last updated way back in 1990.

Increasing the minimum capitalisation requirement and imposing huge licensing fees should just be the beginning because the agenda for reforming this critical sector is long. How do we wean banks from over-reliance on government securities for their profits?

How can we re-orient them to focus on lending to the real economy? We need to encourage them to list on the Nairobi Securities Exchange so as to improve transparency.

Consumer protection

 Should regulation make it mandatory for them to have a credit rating by globally active rating agencies? What do we do to enhance the existing consumer protection framework? Isn’t it time we did a thorough audit and a fit-for-purpose long-term review of the operations of the Kenya Insurance Deposit Corporation? The agenda for reform is long indeed.

 Let’s all wait and see the type of banks and investors who will come in to take advantage of the lifting of the moratorium. What is clear is that this is not just a play on acquiring new customer segments, new geography and new capabilities.

The talk today is about establishing universal payments gateways and acquiring a dominant share of the continent’s international trade. The banks that will be rushing here will be positioning themselves to dominate Africa’s access and links to global financial gateways in India, Dubai and China.

I see a clear trend where competition in the banking sector will be in building payment gateways to the rest of the world. Banking is evolving into a business of building trade platforms and ecosystems. 

And the key attraction in Kenya is that it is one of the few markets in sub-Sahara Africa that does not have exchange controls, has an open capital account, and has some of the most advanced mobile banking applications in the world.

My parting shot to the large traditional players: Fintechs are coming to eat your lunch.

jaindikisero@gmail.com