The time is ripe for bank consolidation

Too many small banks and the fragmentation is why we don’t have a working active horizontal repo market. FILE PHOTO | NMG We have just witnessed the biggest merger in the banking sector’s history. Commercial Bank of Africa and NIC Bank recently published their last regulatory disclosures as separate banks. Next time, they will be reporting as one big bank.

Even within the broader corporate sector, I can’t remember – and I stand to be corrected – a merger of such scale. You can cite the case of Kenya Commercial Bank and the National Bank.

But strictly speaking, that was a government-directed move – and more or less – a case where two anchor shareholders of both banks, namely, the National Treasury and the National Social Security Fund decided to reorganise their shareholding in the two companies.

With the merger of CBA and NIC Bank, are we on the cusp of witnessing more market-based mergers and consolidation in the banking sector? We can only wait and see. Going by recent developments, we appear to be on a trajectory of more market-led mergers as opposed to policy-led mergers.Yet the most effective way by which we can disrupt the status quo in the banking sector is through policy-led consolidation and mergers. Market-led consolidation will take too long to make a meaningful impact. We want to turn our banking system into both an effective mobilizer of national savings and into critical agents of developmental lending.

Today, we have a system that is not good at long-term lending. We just have too many small banks that concentrate on providing short-term money to existing businesses. At a time when the economy badly needs growth, our banking system concentrates on funding consumption and in circulating existing wealth between existing businesses.

The trend and global best practice you witness in countries with similar but more efficient banking sectors such as South Africa, Chile, Australia, Malaysia is consolidation into fewer strong banks. South Africa only has four large commercial banks. We must now confront the imperative of policy-led consolidation of banks. It will not be easy because the main tool for effecting policy-based consolidation, namely, raising minimum capitalisation requirements for banks, has proved politically difficult to achieve. Three years ago, former Treasury Secretary Henry Rotich, attempted to increase the minimal capitalisation requirement for banks from Sh1 billion to Sh5 billion. The proposal was shot down. We must keep trying. When banks are […]

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