Growing number of people and businesses accessing financial services

The banking sector in Kenya is notably diversified, thanks in large part to the country’s efforts to boost financial inclusion. Kenya’s predominant mobile money platform, M-Pesa, is perhaps the best known example, but other elements of the Kenyan system, such as savings and credit associations, microfinance and agency banking, also underscore the diversity and innovation within the sector. Even amongst the largest banks in the country there is an uncommon degree of variety in service provision and customer segments. The financial sector overall is now the third largest in sub-Saharan Africa, behind those of South Africa and Nigeria.

Kenya’s fiscal year ends on June 30, and as 2013/14 drew to a close the banking sector was stable, profitable and well positioned. “Capitalisation is well above the required minimums, credit information systems are beginning to take shape, and the use of agency banking has drastically improved the reach of the banking sector,” said a December 2013 World Bank survey. “With the advent of mobile ICT developments, the ceiling for innovation targeting specific segments of the market and outreach has been raised almost indefinitely.”


Kenya also benefits from strong regional economic integration. For example, banks operating throughout East Africa, including South Africa’s Standard Bank and Kenya Commercial Bank, often base management their teams in Kenya’s capital and from there cover Uganda, Rwanda or South Sudan. One of Kenya’s long-term objectives is to strengthen its position as a financial hub for the East Africa region, and the existing operations based in Nairobi are a good start. While most of the reforms aimed at achieving this goal are specific to capital markets activities, banks are poised to benefit as a well. “There is strength across the banking complex that can justify Nairobi as a financial hub,” said Aly-Khan Satchu, who heads the Nairobi-based investment and advisory firm Rich Securities.

In the domestic market, lenders of all types are looking beyond their core constituencies for new avenues. Retail banking is seeking to move into lower-income segments, which has meant the creation of new branches outside the major cities and a rapid growth of agency banking, in which non-bank representatives – such as shopkeepers – are authorised to offer basic bank services and carry a small cash float to settle transactions outside branches. This is seen as a way to grow a bank’s footprint without the expense of building new branches, and by some, as a way to compete with M-Pesa on its specialty service: small-scale transactions. Meanwhile, a handful of Kenya’s savings and credit cooperative societies (SACCOs) and microfinance providers have grown larger asset bases than lower-tier banks, and they are now beginning to join the ranks of the universal lenders with some success.

Size & Scope

As of April 2014, Kenya’s financial sector was comprised of 43 commercial banks (13 foreign-owned); one mortgage company (Housing Finance Company of Kenya); nine deposit-taking microfinance institutions (those not taking deposits are not regulated); and seven representative offices of foreign banks. Additionally, there are three commercial lenders majority-owned by the state: Consolidated Bank of Kenya, National Bank of Kenya and the Development Bank of Kenya. There are 101 foreign-exchange bureaus overseen by the main banking regulator, the Central Bank of Kenya (CBK), and two credit bureaus. Banks had 1343 branches open as of the December 2013, according to the CBK, the most recent year-long reporting period for which a full slate of statistics are available. That was an increase of 5.6% from 1272 a year earlier.

In the microfinance market, one operation was licensed to take deposits over the course of the 2013, bringing the total of licensed providers to nine. By December 2013, total assets held by microfinance banks had grown to KSh41.4bn ($472m), up 27.8% from KSh32.4bn ($369.4m) a year earlier, according to the CBK’s annual 2013 Bank Supervision report. Over the same period, deposits jumped 60.4%, from KSh15.4bn ($175.6m) to KSh24.7bn ($281.6m), and the total number of deposit accounts increased from 17.6m to 23.8m.

While the CBK is the regulator for deposit-taking institutions, SACCOs are regulated by the SACCO Societies Regulatory Authority (SASRA), which was created in 2008. SASRA’s authority extends only to the deposit-taking SACCOs, of which there are 184 licensed, with these controlling 90% of the market (see analysis). The Kenya Bankers Association (KBA) is the industry group representing commercial banks. However, unlike in other countries, the KBA also plays additional roles in the sector. It helped start a country-wide credit-reporting system, and this initiative has grown to become the Association of Credit Providers of Kenya ISLAMIC: Kenya is home to two Islamic banks: Gulf African Bank and First Community Bank (FCB). Other lenders are offering some sharia-compliant services through Islamic windows – separate counters within a bank branch. In March 2014 Dubai Islamic Bank announced a plan to open up a branch in Kenya, which would add a third provider in the country.

Regulatory frameworks for sharia-compliant financial services in banking, capital markets and otherwise, are in the developmental stages in Kenya. The country has 44m people and only about 10% are Muslims, although Islamic finance presents a greater opportunity to the banking sector than simply to that demographic. The government, which is interested in ways to tap debt markets without exhausting the capacity of local bond buyers, may find sukuk (Islamic bonds) an appealing option with which to attract capital from new sources, particularly for infrastructure projects, of which Kenya has plenty planned.

Given Kenya’s goal of becoming a regional financial centre, Islamic finance would also be part of the diversified suite of options that global investors expect. Sharia-compliant investment vehicles are currently in the design process, and insurance options are emerging as well. FCB has been approved to offer (Islamic insurance), as has Takaful Insurance of Africa. In 2014 the first retakaful business is expected to commence operations at Kenya Reinsurance Corporation, the oldest reinsurer in the region.

Sector Performace

Total assets in the banking system rose 15.9% over 2013, to KSh2.7trn ($30.78bn), according to the CBK’s “Bank Supervision Annual Report 2013”. The total loan book was worth KSh1.58trn ($18bn), and the deposit base was KSh1.9trn ($21.7bn), for a loans-to-deposits ratio of 78.9%. Total capital in the sector reached KSh418bn ($4.77bn), up 18.4% on the previous year. Ratios of total and core capital to risk-weighted assets stood at 21% and 18%, respectively, by year-end 2013. The latter of which is well above the figure of 8% of Tier 1 capital prescribed by Basel II, the global banking standards generally accepted as guidelines for banking-system solvency and prudence.

Sector profitability also increased for the year, to KSh125.8bn ($1.43bn) before taxes. That was an increase of 16.6% from KSh107.9bn ($1.23bn) for year-end 2012. Much of the rise is attributed to a greater diversification of income sources, such as from commissions and foreign exchange trading, as well as falling expenses, CBK data shows. Total income for the year rose 1.6%, whereas expenses declined by 4.8%. Nonperforming loans rose, however, from KSh61.9bn ($705.7m) to KSh81.86bn ($933.2m), implying a ratio of 5.2% of total loans (see analysis).


Kenya’s financial sector has been aggressive in providing non-conventional offerings that work for lower-income segments. According to the World Bank’s most recent data, from 2005, 46% of Kenyans were below the national poverty line and 67% lived on less than $2 a day at purchasing power parity. The country is well known as home to Safaricom’s MPesa, and while other mobile money platforms have since emerged, M-Pesa continues to hold a 72% market share, according to the Communications Commission of Kenya (CCK), the telecommunications regulator, which regulates M-Pesa. The CBK has supervisory authority over mobile money platforms via regulatory control of the banks that the mobile providers partner with. For fiscal year 2012/13, a total of KSh1.7bn ($19.4m) was sent between accounts through mobile money platforms, up 22.7% from KSh1.4bn ($16m) in the previous period, according to the CBK’s annual fiscal report.

The mobile banking customer base stood at 23.75m, up 19.9% year-on-year, with a significant portion of the rise attribute to individuals having multiple M-Pesa lines. The mobile money agents who help to physically settle transactions are vetted and licensed by the CCK and the total number of agents rose to 103,165 in the reporting period. As of April 2013, the average transaction was worth $29.30, and the total monthly value of transactions was KSh142m ($1.6m).

In a move that will be closely watched, Equity Bank plans to open its own telecommunications service as a mobile virtual network operator. Equity, which began in Kenya as a microfinance provider and is now a full-fledged commercial bank, has the largest network of banking agents, providing it with a strong platform for a competitive mobile money initiative. One benefit of mobile money platforms is that transaction sizes can be smaller, and therefore more customers can be reached than a bank could with its traditional range of products. “The key is to access the customers directly,” said Hezron Kamau, finance manager for Victoria Commercial Bank. “You want to control the SIM card.”

The agency banking model is another way to improve inclusion, providing basic services to those far from bank branches. Agents can be people or businesses and have a limited float for transactions, similar to the agents used by M-Pesa. Often, M-Pesa agents are also bank agents. At the end of 2013, the total number of approved agents was 23,477, up 44% from the close of the previous year. Agency banking began in 2010 and, as of the end of 2013, had been used for more than 80.8m transactions. For 2013, agency banking transactions were worth a total of KSh236.2bn ($2.7bn).


One impact of mobile money, agency banking and efforts at boosting financial inclusion has been the decentralisation of banking. This has highlighted the value in seeking out clients beyond the major cities, where banks used to focus almost all of their efforts. While some still do, others have spread banking services out to rural areas and pursued lower-income customers. The number of deposit accounts, at 4.7m in 2007, had jumped to 23.8m by December 2013, according to the CBK. Most of these are micro accounts, according to the World Bank.


As an illustration of this, the portion of the population with no access to financial services at all fell from 38.4% in 2006 to 25% in 2013. Financial inclusion studies are difficult to compare across the region, as they are not updated every year in every country. Nonetheless, Kenya ranks high on the list of African countries in this regard, according to FinScope surveys, an initiative of South Africa’s FinMark Trust launched to better understand the use of financial services in Africa. In a comparison of statistics compiled between 2006 and 2012, Kenya had the highest inclusion rate among 12 key African markets (see analysis).

Big Banks

Kenya Commercial Bank (KCB) is the country’s largest by assets by far, standing at KSh323bn ($3.68bn) year-end 2013. Another five lenders are clustered around the KSh200bn ($2.3bn) mark: Equity Bank, Co-operative Bank of Kenya, Standard Chartered Bank, Barclays Bank of Kenya and CFC Stanbic Bank.

Equity Bank has the largest reach in the country, with 208 branches as of the end of 2012, according to a 2013 banking survey by Think Business, a Nairobi-based publisher of economic research. KCB has the second-largest network, at 173 locations. Standard Chartered, which focuses on high-net-worth clients, has 37; Barclays, 118; and Co-operative Bank, 133.

Another large player is Commercial Bank of Africa (CBA), based in Nairobi, with assets in Kenya of KSh119bn ($1.35bn) and 20 branches in the country. Initially formed as a cooperative, known as Co-operative Bank, to service SACCOs, it has benefitted in the past decade from its status as the main partner for mobile money platform M-Pesa, holding money in escrow to back transactions flowing through the service. It was also the first Safaricom partner for M-Shwari, the savings-and-loan product offered to M-Pesa users. M-Shwari has been a transformative platform for CBA, which provides back-office banking functions for the programme. It has boosted the number of deposit accounts from 34,884 in 2011 to more than 5m by September 2013, according to a World Bank study on Kenyan banking. Only Equity Bank had more at the time, at some 7m.

Regional Interaction

Major Kenyan banks also have a regional presence, operating 288 branches outside the country as of December 2013. That total was up 29% from 223 at the end of June 2012.

However, in the reverse direction, more foreign players from beyond the region have established a presence in the country. Well-known names include South Africa’s Standard Bank, which is doing business in Kenya as CFC Stanbic, and Standard Chartered Bank, the London-based lender focused on developing countries.

Several West African banks have also opened up in Nairobi, including United Bank for Africa (UBA), which began its operations in 2009. UBA is planning a listing on the Nairobi Securities Exchange (NSE), although it has not set a specific date. Ecobank, the Togolese lender with operations across Africa, entered the market in 2008 by acquiring the East African Building Society.

More recently Guaranty Trust Bank, Nigeria’s largest lender by market value, closed a $100m acquisition of 70% of Kenya’s Fina Bank Group in February 2014. Fina, which also has operations in Rwanda and Uganda, was a mid-tier lender, and Guaranty hopes to push its ranking in terms of assets from 19th as of 2010 into the top 10, the bank’s CEO, Segun Agbaje, told local media.

Foreign Investment

Further mergers or acquisitions are likely. In February 2014 Pakistan’s MCB Bank was negotiating to buy Middle East Bank, a smaller Kenyan lender that would provide MCB entry into the market. Two months later, Germany-based private equity firm African Development Corporation, which also holds stakes in Union Bank of Nigeria and Botswana’s BancABC, expressed interest in entering the Kenyan market, according to local newspaper Business Daily Africa.

An alternative for foreign banks is to open a representative office in Nairobi. Rwanda’s largest lender, Bank of Kigali, became the first East African lender outside Kenya to have official presence in Nairobi, after the CBK approved it in 2013 to open a representative office. A new representative licence was also given to the Central Bank of India, bringing the total in the country to seven. The others are the Bank of China; First Rand Bank and Nedbank, of South Africa; HSBC; and HDFC Bank, of India. Additional applications made in 2013 included US bank JP Morgan, and are pending approval.

The option of opening up a representative office is increasingly attractive as Kenya heads into a period in which large-scale financings are set to be required. CBK regulations prohibit Kenyan banks from lending to a single borrower beyond 25% of core capital in order to avoid concentration risks, which means that there is demand for finance in Kenya that the local banking sector cannot handle, such as large-scale project financing, or lending to government. For example, the state had a $600m loan balloon payment due at the end of June 2014, and this was arranged by a trio of foreign banks: Standard Chartered, Standard Bank Group of South Africa and the US lender, Citigroup.

Loan Spreads 

A key issue for Kenya’s largest banks in 2014 and perhaps beyond is likely to be the spread between the cost of funds and the interest rates the large banks charge for loans. “Bank lending rates seem to track hikes in the central bank rate more closely than reductions,” stated the World Bank’s review of the sector. “Small and medium-sized enterprises (SMEs) often cite the cost of credit as a stumbling block in getting access to formal credit.” Commercial lending rates averaged 17.06% in March 2014, according to CBK data, against a benchmark CBK interest rate of 8.5% (see analysis). This is well below some averages in West Africa’s frontier markets, but still elevated.

Such high rates are a concern for SME lending in particular, although data show that firms of these sizes get a larger chunk of available bank capital than in some other major African markets. According to World Bank data, SMEs typically get about 17% of commercial bank credit. The figure is below 10% in Nigeria and South Africa, and at about 14% in Tanzania, while Rwanda’s performance, at about 16%, rivals that of Kenya.

Focused on the interest-rate spread as a key obstacle for SMEs looking for credit, in 2013 the government helped create the Growth Enterprise Market Segment (GEMS), a junior list at the NSE (see Capital Markets chapter). The idea is to provide SMEs with a non-bank option to reduce their reliance on lending by enabling a market listing that comes with simplified obligations for cost and regulatory compliance. As of early 2014, just one company had listed on the new exchange, although this is not unusual: SME exchanges have generally had a challenging time attracting large volumes of listings in African markets, such as Nigeria’s Alternative Securities Market or Egypt’s NILEX. REPORTING: Another reform already in the midst of implementation is credit information reporting. Banks report negative credit history to the country’s two credit bureaus, but not before a customer defaults. Reforms that would require more information sharing and agency reporting may help lenders reduce risks, as they would then be able to better know their loan applicants. Other areas in need of improvement, according to a study by the World Bank, include creditors’ rights and the establishment of an effective collateral registry.

Credit Reference Bureau Africa began operating in 2010, and Metropol Credit Reference Bureau followed in 2011. Kenyan banks are required to report details of all non-performing loans on their books on a monthly basis. Since the inception of the effort, credit bureaus have gone from reporting only negative credit information to adding positive information as well. According to the World Bank’s sector survey from December 2013, they offer information on about 5% of potential borrowers, or roughly 200,000 of 5m existing borrowers across all institutions regulated by the CBK. They also hold information on about 10,000 businesses, and were receiving 80,000-100,000 queries a month. CBK data show that, since 2010, banks have requested around 2.9m credit reports, of which about 1.2m fell in the year to June 2013, indicating that the concept is gaining momentum. In light of this, the regulator said in its annual report, interest rates are primed to fall. “It is expected that borrowers with a good track record would be able to negotiate for competitive credit terms, including accessing credit based on their credit record without a requirement for collateral,” the CBK said.

Reglatory Changes

Kenya’s conventional banks have also adjusted to a hike in minimum capital requirements in recent years. The CBK quadrupled the threshold effective January 2013, pushing it from KSh250m ($2.85m) to KSh1bn ($11.4m). The move was announced in 2008, and all banks had complied by the end of 2012.

In addition, there are new capital ratios to observe. These require a 2.5% buffer above the existing core and total capital ratios, boosting the former from 8% to 10.5%, and the latter from 12% to 14.5%. This change will be enforced from January 2015. The calculation of risk-weighted assets was also adjusted: instead of considering only credit risks, now market and operational risks are to be factored in as well. This change was enforced from January 2014.

The CBK is also working on a regional basis. Within the East African Community (EAC), the regional integration organisation of which Kenya is a member, regulators work together on inspections of banks with presences in multiple countries: for each jurisdiction a bank operates in, the inspection teams add a regulator for that country. Other members of the EAC include Tanzania, Rwanda, Burundi and Uganda. Sharing the regulatory responsibility dovetails with other EAC-sponsored integration efforts in financial services, such as harmonising regulations for capital markets.

Kenya, if it is to further develop as a regional financial hub, stands to benefit from the greatest degree of harmonisation possible. Kenya’s capital-markets regulator, the Capital Markets Authority, studied the issue of regulatory convergence in the EU in preparing its master plan for market reform, and found that benefits of integration are greater if rules and laws are made exactly the same, as opposed to nearly identical. The benefits cited include lower management, compliance and information-technology costs for market participants.


Kenya’s banking sector appears to have moved past a period of instability. Widespread defaults are no longer common, and capital raising has left lenders with bigger balance sheets and increasingly robust fundamentals as measured by the common prudential ratios. The development of credit reference bureaus are helping to lower perceptions of risk, and regulation is aimed at increasing competition and lowering costs, such as the current focus on lowering interest rate spreads. Kenyan authorities are in the process of building on Nairobi’s status as a financial centre, which makes the offering more compelling still. Banks in Nairobi already have a regional outlook, and Kenya is central to the process of regional integration through the EAC and the Common Market for East and South Africa. With more banks establishing themselves in multiple countries, Kenya looks to be on the right side of a growing trend. If the promise of financial inclusion holds – if relatively new and developing products like M-Pesa, agency banking and microfinance are the powerful poverty-eradication tools they are predicted to be – then the Kenyan banking sector will be an attractive proposition for investors, both domestic and foreign.

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The Report: Kenya 2014

Banking chapter from The Report: Kenya 2014

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