Why Kenya needs a fair mix of private and public banks

A National Bank of Kenya branch on Moi Avenue. KCB has got regulatory approval to take over the public bank. PHOTO | EVANS HABIL Following the recent regulatory approval for KCB Group to take over the National Bank of Kenya, one of Kenya’s only three public banks is now set to be transferred into private ownership.

This also comes at a time when there is increased consolidation in the banking sector. The irresistible conclusion within policy circles is that, with 40 banks, Kenya has more banks than its much larger peers South Africa and Nigeria.

However, the demand for credit in Kenya has remained extremely high, and far more than the available supply.

The fact that Kenyans are willing to borrow from mobile loan applications, at annual percentage rates of 72 per cent, shows that the demand for credit is perfectly inelastic and that Kenyans are willing to access credit at any price.

This points to a supply-side constraint and therefore the question begs — does Kenya need fewer banks or more?

A closer look at the statistics might yield better insights. The average Return on Equity in the banking sector is quite high at well over 20 per cent and in some banks, it is over 30 per cent, making it a lucrative investment sector.

In a free-market economy, this should attract more investors to enter the market until a natural market equilibrium is attained. This is exactly what happened in 2017 when the Central Bank of Kenya (CBK) lifted a freeze on the licensing of new lenders.

About nine banks expressed interest to enter the Kenyan market. However, little has been said on the status of their application.

Secondly, while there has been remarkable growth of private banks, there has been little focus on developing public banks, which have the potential to unleash immense growth across the country.

In her book The Public Bank Solution: From Austerity to Prosperity, Ellen Brown highlights the benefits of public banks operated as public utilities and returning their profits to the public.

In China, state-owned banks have been the engine that funded the infrastructure development, lifting the country from poverty to super-power status. It’s little wonder that the Industrial and Commercial Bank of China, the China Construction Bank Corporation and the Agriculture Bank of China are the three largest banks in the world.In Kenya, this model would particularly benefit neglected sectors such as agriculture, which currently receive only one per cent […]

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