Hoping For More To Bank On

Published 7 years ago
Hoping For More  To Bank On

It’s bad news when a commercial bank collapses; it’s frightening when three of them go under within just eight months in a single market.

The back-to-back collapse of mid-tier Chase Bank, Imperial Bank and Dubai Bank sent chills across the Kenyan financial sector – eliciting a scramble for remedial measures, including consolidation and review of capitalization requirements for banks.

Chase Bank’s operations were taken over by the Central Bank of Kenya (CBK) in April after its management failed to declare KES8 million ($80,500) in insider loans, causing panic withdrawals and a run on the bank.

Imperial Bank was taken over in October after fraud was uncovered. Two months earlier, smaller lender, Dubai Bank, was put into receivership.

This state of affairs triggered anxiety on the health of the banking sector in Kenya even though regulators and the National Treasury have gone all-out to downplay the concerns, calling the bank closures “isolated cases”.

“I want to assure my fellow Kenyans that our financial sector remains strong and stable. The recent placing under receivership of three banks was due to specific factors related to these banks and not the whole banking sector,” says Finance Cabinet Secretary Henry Rotich, as he sought to calm nerves over the health of the East African nation’s financial sector.

But even with the assurance, Rotich and his team at the Treasury are not resting. They are planning a raft of strategies, including consolidation, in an attempt to clear weak lenders from the Kenya’s banking sector and help restore confidence through larger and better capitalized outfits.

Rotich plans to re-introduce higher capital levels for banks to guarantee their financial health.

“Last year, I did table in this house specific measures to increase the capitalization of banks in order to ensure we have a strong and stable banking system but our efforts were not successful,” Rotich told the Kenyan Parliament in June when he presented his budget speech.

In 2015, Kenya’s legislators shot down Rotich’s proposal to raise commercial banks’ minimum capital fivefold to KES5 billion ($50 million) within three years, after CBK Governor Patrick Njoroge said such a move would strangle smaller lenders.

Rotich, however, is keen to push through the higher capital requirements this time round and by extension trigger consolidation of weak lenders in an attempt to prevent further financial glitches among the 42 licensed commercial banks.

“I am seeking to introduce the proposals and I am hopeful that members will look at them more favorably in light of the recent developments in our banking industry,” says Rotich.

The impending changes in bank capitalization requirements have already triggered action among small lenders that are keen on complying.

Midsized lenders, presently feeling the pressure to consolidate to capitalize on economies of scale and remain relevant, have already taken to mergers or pacts with private equities to boost the asset position.

I&M Holdings, which has stakes in banks in Kenya, Tanzania, Rwanda and Mauritius, is set to finalize a KES5 billion ($50 million) deal to merge Giro Commercial Bank with its subsidiary I&M Bank.

“In our view, the acquisition will have minimal strategy disruption given similarities of the two banks – both have conservative balance sheets and mainly target middle- to high-income customers as well as SMEs (small and medium enterprises),” the listed lender said in a statement in June.

Small-sized Kenyan lender Oriental Commercial Bank formally rebranded to M-Oriental Bank in June following the acquisition of a 51% stake in the shareholding of Oriental by Bank M Tanzania.

The Kenyan banking industry has also witnessed several other acquisitions recently, including the 75% purchase of Spire Bank (formerly Equatorial Commercial Bank) by Mwalimu Sacco and Nigeria’s Guaranty Trust Bank acquiring Fina Bank.

In 2014, investment group Centum also completed the acquisition of K-Rep Bank (now Sidian Bank) in a deal that raised Centum’s shareholding from 7.54% to 67.54%, having been a minority shareholder in the bank since 2004.

Centum’s acquisition was effected through Bakko Holdco Ltd, a non-operating holding company, to conform to CBK guidelines.

Kenya’s largest bank by asset base, KCB Group, is also looking at medium-sized lenders to buy as part of an expansion plan and is building up capital to boost its acquisition war chest.

“We will look for businesses where there can be synergy, where there can be ability for us to scale up, so medium-sized banks will be areas that we are focusing on today,” KCB CEO Joshua Oigara told Reuters.

In May, KCB Group shareholders gave a nod to the lender’s plan to raise KES10 billion ($100 million) through a rights issue later this year to boost its capital levels. KCB’s total capital stood at KES79 billion ($795 million) at the end of 2015.

KCB Group is expected to acquire a majority stake in Chase Bank after it was recently appointed to manage the mid-tier bank that only re-opened after a brief closure due to liquidity problems following a run by panicked depositors.

The government is also considering merging National Bank of Kenya (NBK), Development Bank of Kenya and Consolidated Bank, which it owns, in a bid to take advantage of having a large lender.

“We are making progress on the issue of consolidation because we now have a consultant who will soon be advising us on how to move. We expect to consolidate the state banks into one or two banks very soon,” Rotich said in April.

The changes in bank capitalization have also seen an inflow of private equity to try and boost the books of Kenyan banks.

In March, Fidelity Commercial Bank announced British private equity and asset management firm Duet Group had acquired a significant stake in the small lender. In the deal, Fidelity Bank will receive KES1.9 billion ($19 million) from the sale and boost its capital position, which was narrowly above mandatory requirements following an increase in adequacy ratios in 2015.

Furthermore, Norway’s investment fund for developing countries, known as Norfund, in partnership with NorFinance, an investment firm created by Norfund and private investors, purchased a 12.22% stake in Kenya’s Equity Group Holdings for an estimated KES26 billion ($261 million) from private equity group Helios Investment Partners.