By James Muliro
Kenyan banks need to engineer new products and diversify more geographically if they are to sustain their profitability, says a new report, ‘State of the Economy’ released by economists at Mentoria Consulting.
This comes in the wake of a darkened economic outlook in Kenya following the poor performance reported in the financial sector in the past year.
“In the long term, banks should not only diversify by product, but also by geography to minimise the risks of poor returns in the country in future as the banking market edges closer and closer to saturation. To cushion themselves from macroeconomic shocks, banks not only rely on interest income, but also on fees and commission income from transactions including FX,” says Ken Karuga, an economist at Mentoria Consulting.
A number of local banks such as KCB, Equity, Diamond Trust Bank, NIC and I&M have operations across East Africa. Besides Kenya, KCB has operations in Uganda, Tanzania, Rwanda, South Sudan and Burundi while Equity has operations in Uganda, Tanzania, Rwanda, South Sudan and the Democratic Republic of Congo (DRC). At present, both Equity and KCB are eying markets such as Ethiopia, Zambia and Mozambique although such plans may take time to mature as the lenders are currently moving to consolidate their operations in the markets they operate in. KCB has however, made the first step in its entry into Ethiopia following the opening of a representative office in the second most populous country in Africa.
While releasing the 2015 financial results in March this year, KCB chief executive officer, Joshua Oigara stated that the bank is now positioning itself as a continent-wide lender, with plans to have a presence in at least 10 countries by 2020. Some of the countries on its radar by that time include Somalia, Mozambique and the DRC.
Technology-wise, virtually all lenders in the country have joined the digital and mobile payments bandwagon in a bid to increase efficiency, cut down on costs, mobilise deposits and generate more income from transactions. Lenders such as KCB and Commercial Banks of Africa have firmly hinged themselves on the KCB M-Pesa and M-Shwari platforms respectively.
“Lending has never been easier and faster than it is today because of KCB Mpesa that allows customers to access funds instantly on their mobile phones and we see this as a key cog in our growth story,” Mr Oigara said.
Adoption of the mobile and Internet banking has helped banks cut costs associated with the conventional brick and mortar branches. This has however been a double edge sword as many workers in the banking industry have been declared redundant on account of the adoption of such disruptive technologies.
Some jobs in the banking industry also came at the expense of the agency banking model, which transmitted operational costs to third party agents. Industry players now suggest that with the adoption of innovations in the banking industry, customers should feel encouraged to adopt such channels for simple transactions. The brick and mortar branches should on the other hand be preserved for enhancing the longer term relationships with clients in cases where human interaction is of the essence.
These are some of the disruptive technologies that have supported exponential growth in Kenya’s banking industry. Nevertheless, despite the banking industry exhibiting strong growth in the past ten years, many of the jobs that have been created in the economy are from the informal sector, which the banking industry barely supports. Even the World Bank last month said Kenya’s economy has not been generating sufficient jobs as it should ideally have been doing in spite of the fact that Kenya’s economy has been relatively better than most of her African peers.
Analysts however, say that the financial services sector in collaboration with the government should have been at the forefront in supporting the informal sector by putting in place mechanisms that would support their growth and job creation. In light of calls for the financial institutions to diversify their products and expand geographically, there have also been deeper calls for them to consolidate. This might make it even harder for the formal financial service providers to reach out to the informal sector.
Matters are not getting any easier for the banking sector and other sectors of the economy with the economic slowdown persisting occasioned by a difficult operating business environment, tight liquidity in the money market, government expenditure cut-downs and high interest rates.
“The combined effects of a volatile banking sector, austerity campaigns by the National Treasury and a general global economic slowdown have conspired to create a toxic brew that has darkened the economic outlook for the country. The received wisdom in policy circles is that structural reforms will be needed to salvage a fractional reserve banking system that is threatening to come off the rails,” economists at Mentoria Consulting posit.
