Compared to other African countries, Kenya has a crowded banking sector. In June 2015, in a country of 43m people, there were 43 commercial banks. The top 10 banks take 70% of the market. There are also 12 microfinance banks, eight representative offices of foreign banks, 86 foreign-exchange bureaus, 14 money-remittance providers, three credit reference bureaus and one mortgage finance company. This does not include the 180 savings and credit cooperative societies (SACCOs) or microfinance institutions.

To meet regulatory requirements, many banks will need to raise substantial new capital. The National Assembly may have rejected the finance ministry’s proposal to raise minimum capital from KSh1bn ($11m) to KSh5bn ($55m) by 2018, yet higher reserve ratios and a shift towards a more risk-based approach to capital means banks will need to build up buffers. All this points to a higher likelihood of consolidation in the coming years. Ratings agency Fitch noted in June 2015 that this could benefit the sector, which in its current, fragmented state is unable to finance some of the larger infrastructure projects independently.

Foreign Entrants

Kenyan banks can be attractive targets for foreign acquisitions, providing a route into the fast-growing East African region. Most of the large and mid-tier ones already operate in the five EAC countries; some are extending as far as South Sudan, Malawi, Mozambique and Mauritius.

Expansion is driven by larger banks’ need to exploit economies of scale and mid-tier banks’ need to achieve them. The last foreign bank to start a “greenfield” operation in Kenya was Nigeria’s United Bank of Africa, in 2009, yet the persistance of foreign appetite was illustrated at the end of 2014 when global private equity firm Helios sold half its 12.22% stake in Equity Bank to Norwegian funds.

Domestic Deals

There has also been some movement within the domestic banking sector, as big banks look for smaller specialist institutions and small banks look for bigger opportunities to expand. In September 2015 I&M Holdings, which is listed on the Nairobi Stock Exchange, announced it had reached an agreement to buy Giro Commercial Bank, a tier-III bank ranked 27th out of 44 banks with a market share of 0.49% in December 2014. Once approved by three regulators and shareholders, Giro’s business and seven branches, focusing mostly on small and medium-sized enterprises (SMEs) and retail customers, would immediately be absorbed into I&M bank, which was 10th-largest in December 2014 with 4.1% share. In mid-October 2015 I&M bought 65% of finance advisory and stockbroking firm Burbridge Capital.

Headlines were made in March 2015 when Mwalimu Cooperative Savings and Credit Society, Kenya’s largest SACCO with 60,691 members and savings of KSh18.3bn ($201.3m), got the go-ahead to buy 32-year-old Equatorial Commercial Bank for KSh2bn ($22m) from businessman Naushad Merali and to inject another KSh600m ($6.6m) to steady the bank’s finances. The acquisition also brought ownership of Equatorial Insurance Brokerage and an indirect interest in Fidelity Shield Insurance. In November 2014 NSE-listed Centum Investment Company bought an additional 60% stake in K-Rep Bank, which had 36 branches and 200,000 largely small-business customers, for KSh2.5bn ($27.5m), taking its total to 67.5%.

Mid-Tier Rising

The 16 mid-tier banks are showing particularly strong growth. They saw their asset base grow to KSh1.4trn ($15.4bn) at the end of 2014, or 43% of the sector total of KSh3.2trn ($35.2bn), and customer deposits at these banks made up 42% of the industry total of Sh2.29trn ($25.2bn), according to the Central Bank of Kenya (CBK). The six large-tier banks fell from 51.5% of customer deposits to 49.6% and 22 smallest banks from 10% to 8.8%. The big banks’ share of industry assets held fell from 52.9% to 48.8%, while the 22 small-tier banks fell from 9.5% to 8.5%. The top four banks in the mid-tier are CfC Stanbic, Diamond Trust Bank, NIC and I&M, which will rise to third once the Giro bank merger finalises.


According to Marcel Mballa-Ekobena, executive head of investment products sales East Africa at CfC Stanbic Bank, the sector is still sub-optimal, as banks need more capital but are finding it hard to differentiate or articulate their value propositions in such a diversified economy. “Even 35 banks is too many given the size of our economy – remember that total sector profit was around $1.1bn in 2014. Consolidation cannot be put off forever,” he told OBG. However, he felt that consolidation should be driven by commercial pressures, not forced by regulators. This would enable key banks to build on their strengths – KCB are known for their large domestic corporate capability, Equity Bank for microfinance and SME lending, Co-op Bank for SACCOs, and foreign banks mostly for investment banking and global clients. A counter-argument to consolidation is that some banks have niches, according to R Armando Morales, resident representative of the IMF’s Africa department. “The small banks are usually the ones driving innovation,” he told OBG. “There is a very good experience with Equity Bank; they were smaller and they were not in good shape before they decided to change their strategy. Now theirs is a success story.”

Capital- Raising

In rejecting the finance ministry’s call to raise minimum capital, the National Assembly seemed to back the new CBK governor Patrick Njoroge, who has said small banks are needed as they serve niche clients who also contribute to growth. As Fitch noted in June 2015, “Raising substantial new capital in the country’s equity markets may prove difficult. We expect foreign investors’ appetite for emerging-market risk to reduce once interest rates begin to rise in the US. The small size of some of the banks will also be an obstacle to attracting new investors. Kenya’s banks have healthy profitability, reporting a return on average assets of around 3%. But the fairly short timeframe for meeting new capital requirements means we think they are unlikely to rely on retained earnings alone to boost capital.”

Consolidation will happen, though it is unclear what form it will take, according to Philip Odera, CEO of CfC Stanbic. “Larger banks looking to acquire smaller players will have to conduct significant due diligence,” he told OBG. “A healthy level would be 10-15 strongly capitalised and well represented banks. Acquisitions will be difficult as many of the banks have very different structures and corporate cultures, and many clients have multiple accounts.” In June 2015 Henry Rotich, cabinet secretary of the National Treasury, had painted the big picture, as outlined in the national Vision 2030 document: “Kenya needs to have strong, well-capitalised financial institutions, which are not only able to participate in financing the large projects envisaged in the vision, but that are also well capitalised to withstand financial shocks and crises.”