Kenyan market participants have hailed the seemingly imminent lifting of a moratorium on new banking licences that’s been in place since November 2015.
The governor of the Central Bank of Kenya (CBK) Patrick Njoroge, who was new to the position at the time, introduced the ban following doubts about the institution’s supervisory capacity, and concerns over financial stability and public confidence in the industry. His aim was to help the CBK carry out due diligence of the sector and tighten its own procedures, and allow certain firms to review their business models.
A recent statement from the central bank confirming that two banks had been permitted to continue their applications for licences also implied that the moratorium would soon be lifted altogether.
“Some pretty radical and at times overzealous steps have been taken to solve the problems the central bank saw in the banking sector,” said Richard Harney, Kenya managing partner at Bowmans.
“Those criticisms undoubtedly have weight – we have a very vibrant, competitive sector here but there is too much diversification and a definite need for consolidation.”
As of December 2015, there were 43 banking institutions in Kenya, 40 of which are privately-owned. This gives Kenya one of the highest ratio of banks to population in the world – about one bank for every 1.07 million people.
Late 2015 was a fairly turbulent time for the country’s financial services sector with three institutions - Dubai Bank of Kenya, Imperial Bank and Chase Bank - all placed under receivership within months of each other. Dubai Bank was later liquidated.
- Kenya’s central bank governor has indicated that he is almost ready to lift a controversial ban on issuing new banking licences, which has been in place since November 2015;
- Views on the ban are mixed; while most agree the reasons were valid they also think it could have been executed more effectively;
- Allegations of corruption at some firms and doubt in the central bank’s supervisory capacity caused the new recruit Patrick Njoroge to take hasty steps;
- Since the moratorium was implemented the central bank has made significant progress in improving governance and boosting financial stability;
- Local lawyers say the market is ready for new institutions to enter but could still do with further consolidation.
At the time the moratorium was introduced two firms, Mayfair Bank and Dubai Islamic Bank, were in the final stages of the lengthy licence application process.
For those institutions the moratorium has been protracted and incredibly expensive. “To have put in a considerable amount of equity and investment to set up the institution to then be told very close to the end that your application is basically frozen – that’s hard,” said a lawyer who is advising one of the firms. “They’ve hired staff and rented local properties. This has been very difficult for them.”
Since the moratorium was introduced, the CBK has now significantly stepped up monitoring procedures and there’s now a sense of security in the market. “The panic that’s existed for many months – there was a time when people were running from bank to bank to shift funds – is beginning to settle,” said Akash Devani, senior partner at Anjarwalla & Khanna.
He added that the CBK has played a central role in restoring public confidence in the sector by taking a more stringent approach to day-to-day operations.
Among those changes are significantly enhancing know-your-customer (KYC) checks and a tightening of rules surrounding remittances, which forbids any transaction higher than $10,000 from being cleared by any means other than a SWIFT transfer. It has provided further guidance on capital adequacy assessments and emphasised the importance of effective risk management.
“But most importantly, the banks are being stringent themselves,” said Devani.
"If the share capital is increased many bank would have no choice but to merge or put in a significant investment"
According to Anne Kinyanjui, partner at Iseme Kamau & Maema Advocates in Nairobi, there were also concerns about the capitalisation of local banks. Commercial banks in Kenya have to comply with a minimum capital requirement of KES 1 billion ($9.6 million) though the Treasury wants to raise that to KES 5 billion.
“If the share capital is increased many banks would have no choice but to merge or put in a significant investment,” said Devani.
According to Harney, the government has in the past introduced initiatives via legislation to encourage banks to merge and/or consolidate, to little effect.
The existing ban does not apply to M&A, and a small number of deals did manage to get through including UK government-owned CDC Group’s acquisition of a stake in I&M Holdings last April.
“There are a lot of small to medium-sized, often family-owned institutions here capitalised to the minimum required,” said Harney. “They’ve kept pace with the legal requirements here but it’s unclear how well they’d be able to compete with the big international banks.”
Plus, the competitive pressures on these institutions have only grown. Kenya is a world leader in mobile money – its M-Pesa money transfer service turned 10 this year. Many of its citizens side-stepped the traditional bank account route altogether: M-Pesa has brought financial inclusion to around 20 million Kenyans.
The authorities would also like to see foreign institutions entering the market via M&A with local firms as opposed to greenfield investments – but the risk appetite of global banks is not what it used to be and allegations of corruption, no matter how much progress the central bank has made over 18 months, are likely to be an issue.
Kenya’s corporate overhaul causes confusion
Qatar’s confusing crackdown