With more banks per head than other major African markets, Kenya is a world leader in mobile money technology. Opportunities beckon across East Africa and beyond, and capital can be raised swiftly to meet evolving regulatory requirements. Foreign banks still face stiff competition from home-grown contenders, but the scope for future growth means more are keen to enter.

Key to success in Kenya is the ability to create and grow products – and institutions – that respond to the needs of Kenyans for convenience and efficiency through alternative banking channels such as mobile, internet and agency banking. This opens growth markets in other segments, including small and medium-sized enterprises (SMEs) and the informal sector, that have traditionally been less involved in formal banking services.

Similarly, banks realise that what works in Kenya could be a platform for growth across neighbouring countries and further afield, and a race for new customers means expanding branch networks both in Kenya and in the EAC region.

Crowded Field

As of June 30, 2015, there were 43 commercial banks, 12 microfinance banks (MFIs) and one mortgage finance company regulated by the Central Bank of Kenya (CBK), which sets prudential regulations including minimum liquidity ratios and cash reserve ratios.

The number of banks may have fallen to 40 by time of press, should liquidations and a merger go through, but it is still high relative to Kenya’s 43m population. For example, Nigeria has 22 banks for 180m people after a bout of consolidation, and South Africa 19 for 55m. The biggest 10 banks account for 70% of the market and seven of them are local. This indicates the high level of competition and the agility and innovation of local banks.


MFIs offer retail lending widely, including to SMEs, and many would like to transform into banks, a trajectory that has been eked out previously by locally owned Equity Bank and Family Bank, which are now full-scale commercial institutions. Two MFIs – Faulu, which was recently acquired by South African insurer Old Mutual, and Kenya Women Finance Trust – have a combined 80% share of their market.

Also in the market are over 4000 savings and credit cooperative societies (SACCOs), of which 180 are deposit-taking SACCOs licensed by the SACCO Societies Regulatory Authority. SACCOs are often a first choice for borrowers, particularly in the middle class, and they have been wielding greater clout in recent months. Like MFIs they are looking to expand their footprint, and in March 2015 Mwalimu SACCO for teachers bought Equatorial Commercial Bank for KSh2.6bn ($28.6m).

There are also two fully fledged Islamic banks, Gulf African Bank and First Community Bank. The banking act has not yet been amended to allow Islamic products and so the CBK approves them on a case-by-case basis. So far the two banks have 150,000 clients, and while the appeal of sharia-compliant banking products extends well beyond religious boundaries, nonetheless with 4m Muslims in the country, the potential for growth in this segment is sizeable. In July 2015 Dubai Islamic Bank said it aimed to set up a new bank with branches in Nairobi and Mombasa.


According to figures published by CBK, the banking sector is growing and profitable, although expenses are climbing faster than revenues and non-performing loans have also increased. The sector is ahead of minimum reserve requirements. The banking sector’s overall balance sheet grew by 21.4% to KSh3.6trn ($39.6bn) in June 2015, up from KSh3trn ($33bn) a year earlier.

Banking sector gross loans were up 21% to KSh2.2trn ($24.2bn) in June 2015 from KSh1.8trn ($19.8bn), mostly due to an increase in lending to wholesale and retail trade, restaurants and hotels, and manufacturing. The banks held a deposit base of KSh2.6trn ($28.6bn) in June 2015, compared to KSh2.1trn ($23.1bn), up 20% on the year, partly as a result of remittances from Kenyans living abroad, according to CBK’s monthly economic report.

The capital position also improved, with total shareholders’ funds rising by 18% from KSh459.4bn ($5.1bn) in June 2014 to KSh543.3bn ($6bn) in June 2015; core capital was up from KSh374.6bn ($4.1bn) to KSh458.1bn ($5bn), and total capital from KSh436.6bn ($4.8bn) to KSh549bn ($6bn). The core capital to total risk-weighted assets ratio increased from 15.0% in June 2014 to 15.7% in June 2015, and the ratio of total capital to total riskweighted assets moved up from 17.5% to 18.9%.

Total income reported during the year across the sector increased by 13.7% from KSh199bn ($2.2bn) in June 2014 to KSh226.3bn ($2.5bn) in June 2015, while total expenses increased further, by 16.7% from KSh128bn ($1.4bn) to KSh149.4bn ($1.6bn) in June 2015. Major sources of income were interest on advances (60%), other income (16%) and interest on government securities (16%). Key expenses were interest on deposits (36%), salaries and wages (27%), and other expenses (22%).

Measured by pre-tax profits, profitability improved by 8% from KSh71bn ($781m) in the period to June 2014 up to KSh76.9bn ($845.9m) for the period to June 30, 2015. However, annual return on assets fell to 3.3% from the June 2014 figure of 3.7%, and return on shareholders’ funds also fell, to 28.3% in June 2015 from 30.9% in June 2014. Cytonn Investment Management, in its third quarter report, said, “banks released the weakest earnings growth in six years”, comparing the 8.3% growth with 15.6% in the same period in 2014.

For the month ended June 30, 2015, average liquid assets amounted to KSh970.1bn ($10.7bn), while total short-term liabilities stood at KSh2.5trn ($27.5bn), resulting in an average liquidity ratio of 38.7%, well above the stipulated minimum level of 20% and the same as in June 2014.

New Rules

The CBK, under its new governor Patrick Njoroge – he took on the job in June 2015 – advocates a “smart” policy towards capitalisation using a risk-based approach, and it has a robust capital-adequacy ratio plan in place. January 2015 was the deadline for banks to increase the total capital to risk-weighted assets ratio to 14.5%, up from 12%. The ratio helps ensure lenders can absorb any market shocks such as bad loans. The minimum core capital to risk-weighted assets ratio – a measure of a bank’s financial strength based on what shareholders have put in – is 10.5%, up from 8% previously. Banks have to boost cash reserves at the end of each month in terms of the new cash reserve ratio cycle, which results in a tightening of market liquidity. “The biggest challenge is meeting the capital requirements,” Richard Mambo, head of global financial institutions (East Africa) at Standard Bank, told OBG. “We find a lot of banks either issuing corporate bonds or doing rights issues; there are a lot of calls for capital.”

In his 2015/16 budget statement in June 2015, Henry Rotich, cabinet secretary of the National Treasury, proposed “to increase the minimum core capital for banks, mortgage finance companies and insurance companies”. Rotich suggested raising the minimum core capital requirement for banks progressively from KSh1bn ($11m) to KSh5bn ($55m) by December 2018.

However, on August 27, the National Assembly rejected the proposal, saying it would stifle the sector’s growth. Mutava Musyimi, the head of parliament’s budget committee, told Reuters, “If you raise the core capital requirement you are really saying those without deep pockets have no chance of joining the banking sector.”

Mutual Interest

CBK and the Kenya Bankers Association (KBA) continue to push for improvements, including transparency, so that customers will be able to learn more and have more choice, not just regarding rates but also based on customer service, speed and other qualities.

One of the main tools is the Kenya Banks Reference Rate (KBRR), which was created by CBK and replaces the base lending rate used by commercial banks to price their products. It is determined based on the average central bank rate and the two-month moving average of the 91-day Treasury bill rate. The KBRR is set every six months (barring special circumstances) and was launched in July 2014 at 9.13%, adjusted in January 2015 to 8.54%, and in July 2015 the CBK committee hiked it to 9.87%. Banks can determine what margin to add and there is more information available for consumers so they can see who is charging competitive rates and who is not and understand why these rates move up and down. Much SME lending is at 16-18%, Habil Olaka, CEO of KBA, told OBG.

A second initiative, introduced in May 2014, is to introduce annual percentage rate (APR) pricing, which Olaka says will allow consumers to compare different bank loan costs in terms of total cost of credit, based on standardised parameters and a common computation model.

NPL’s & Credit Bureaus

Bringing down interest rates also requires improved transparency from customers. Non-performing loans (NPLs) can hurt banks’ growth, particularly as interest-rate volatility and hikes compromise borrowers. Competitive pressure and performance targets for lending officers mean more marginal clients get approved and banks chase riskier business. The legal system can make it hard for banks to recover their loans – one bank told OBG it took them 10 years to recover a loan. NPLs have increased in tourism due to falling tourist numbers and in construction due to late payments by governments.

According to CBK statistics, gross NPLs increased by 22% from KSh101.7bn ($1.1bn) to KSh123.9bn ($1.4bn) over the year to June 2015. However, on the back of increased overall lending, as a ratio of gross NPLs to gross loans, the figure declined marginally to 4.6% at the end of June 2015 from 4.7% a year earlier. The coverage ratio, measured as a percentage of specific provisions to total NPLs, increased from 38.5% to 39.1%. The quality of assets, measured as a proportion of net NPLs to gross loans, decreased marginally from 2.8% in June 2014 to 2.7% in June 2015.

Credit reference bureaus (CRBs) can counter this trend by providing information about bad borrowers, and this in turn can reduce the costs of lending. The first bureau, Credit Reference Bureau Africa, opened in February 2010. There were a total of three licensed CRBs – Metropol Credit Reference Bureau and Creditinfo Credit Reference Bureau in addition to Reference Bureau Africa – at the end of June 2015. They also encourage cooperation among the banks, but KBA’s Olaka said that only 35% of banks and other deposit takers contribute information. According to the World Bank’s “Doing Business” 2015 report, 14.3% of adults were covered by the CRBs in Kenya, in comparison with an average of 5.8% in sub-Saharan Africa and 67% in OECD countries.


Increasing people’s access to finance helps combat poverty and boosts growth for the banks. The FinAccess National Survey shows that in 2013 nearly 33% of the adult population accessed financial services from formal, regulated financial institutions. The proportion of the population who are totally excluded from financial services has been falling fast, from 39% in 2006 to 25% in 2013.

Olaka said that agency banking – whereby non-bank representatives, such as shopkeepers, are authorised to offer basic bank services and settle transactions outside branches – by large banks such as Kenya Commercial Bank (KCB) and Equity Bank had driven down the number of people excluded. He said that second-tier banks still have much room to grow with the model. Bank use rose from 13% in 2006 to 29% by 2013, while usage of SACCOs fell from 13% in 2009 to 9% in 2013.

However, data released in May 2015 by the CBK suggest it is the largest banks which have the greatest capacity to offer the lowest-cost microfinance loans, normally defined as credits of KSh100,000 ($1100) or less, usually for equipment, inventory, or for start-up or working capital and with little or no collateral. Equity Bank was cheapest, charging 14% on micro-loans, followed by National Bank of Kenya at 15.58% and Century Microfinance Bank at 17.79%.


The CBK has earned a reputation as a solid and strict overseer for the banking industry, and has increasingly sought to bolster the soundness and stability of the sector alongside improving customer protections. Crucially for a sector that is seeking to entice the unbanked to join, it has in place deposit insurance. Depositors at Kenyan banks are covered up to KSh100,000 ($1100) each by the Kenya Deposit Insurance Fund.

Indeed, to this end, regulation tightened in the second half of 2015. In August 2015, the banking regulator CBK put Dubai Bank into receivership and then into liquidation. Evidence of insider trading, theft of customer funds, parallel banking and defaults had come to court in a 2012 wrongful dismissal case. According to the CBK, an investigative report by Kenya Deposit Insurance Corporation found that given “… the magnitude of weaknesses of Dubai Bank, liquidation is the only feasible option”. Shareholders of other small banks have already taken remedial action including capitalisation, according to reports.

On October 13, 2015 Imperial Bank was closed after the bank’s directors informed CBK of “inappropriate banking practices that warranted immediate remedial action in order to safeguard the interest of both depositors and creditors”. Imperial Bank had launched a KSh2bn ($22m) bond issue in August to help it meet statutory reserve ratios and grow. That same day, however, the securities regulator – the Capital Markets Authority (CMA) – coordinated with the CBK and suspended the bond’s listing and trading on the Nairobi Securities Exchange. “CBK assures members of the public that Kenya’s banking sector remains safe and robust,” CBK’s Njoroge and Paul Muthaura, CMA acting CEO, said in a joint statement.


The proof of that joint statement is in part evidenced by the ongoing growth of Kenya’s bank networks, both domestically and internationally. “Banks mostly still rely on bricks-and-mortar expansion to build secure customer relationships although the pace is slowing,” Philip Odera, CEO of CfC Stanbic, told OBG. Banks are gearing up to expand to the new counties, although the northeast regions remain underserved, mostly due to security worries. In counties where there are not enough banks, microfinance provides access.

In May 2015 Equity Bank announced plans to buy a 79% stake in ProCredit Congo, a top bank for lending to SMEs and the seventh-largest by assets in the Democratic Republic of Congo, alongside German state-bank KfW (12%) and IFC (9%). Equity was reported to have allocated some $60bn for expanding the branch network and strengthening the latter bank’s operations.

Lending Opportunities

Kenya’s banks are gearing up to participate in financing huge infrastructure projects, including power plants, port expansions, 10,000 km of roads, and the Lamu Port-Southern Sudan-Ethiopia Transport Corridor that includes a northern oil pipeline to Uganda.

Equity, NIC, Co-operative Bank of Kenya, KCB, CBA and Chase Bank are among the locals that have investment banking units, but foreign banks with access to a foreign-currency balance sheet and funding are likely to continue to dominate the larger projects, a common trend in many African markets where balance sheet size constrains local banks’ ability to finance independently. As a result, local banks are taking a bigger share in syndicates and also investing in infrastructure bonds.

In July 2015 the state-run Kenya Pipeline Company signed a $350m, 10-year loan at 5.38 percentage points above Libor with six commercial banks to help finance a 450-km refined oil products pipeline between Mombasa and Nairobi, separate from the northern oil pipeline. CFC Stanbic Bank, Citibank Kenya, CBA, Co-operative Bank, Rand Merchant Bank and Standard Chartered Bank each lent $58.33m. A statement from Co-operative Bank said: “The successful fundraising of such substantial magnitude, notably in foreign currency, marks the coming of age of Kenyan banks in large-scale infrastructure financing.”


While Kenya has a wide and diverse array of retail lending tools, tailored to a sizeable cross-section of the population, mortgages have been slower to take off. The CBK says mortgage lending was up nearly 20% in 2014 to KSh164bn ($1.8bn) but featured only 22,013 accounts, up from 19,879 in 2013 and 18,587 in 2012. Most banks finance 90% of the property’s cost but others, including Housing Finance (5840 accounts – KSh45.2bn, $497.2m) and KCB (5914 accounts – KSh41.3bn, $454.3m), cover the upfront costs too and offer riskier 105% financing.

As Chege Thumbi, CEO of Credit Bank, told OBG, many people do not like the idea of the bank owning their homes and prefer to take out a normal loan to finance the construction. Many prefer to build in stages as funds become available and to use financing from SACCOs, which offer more flexible terms. Another issue is affordability, with the average mortgage loan from commercial banks recorded at KSh7.5m ($82,500), meaning that a 10-year loan at 15.8% will be unaffordable to people who earn less than KSh300,000 ($3300) a month. Banks are exploring new models, for instance communal mortgages.


Bigger banks will control retail banking for the foreseeable future, while local big players will dominate growth. Foreign banks have focused on serving international clients and the top end of the market, limited by international banking governance and “know your client” rules. Kenya’s growing middle class is boosting retail banking and products such as mortgages and personal loans and is likely to continue to drive adoption of credit cards, which have high penetration among highnet-worth customers. However, the strength and convenience of mobile banking may constrain the uptake of more traditional products. As the busy Kenyan market continues to grow and mature, and with clear sights towards the huge potential of the region and the rest of Africa, domestic banks should have a very busy period ahead of them.