EDITORIAL: CBK support for mergers to boost banking sector

The decision by the Central Bank of Kenya (CBK) to support mergers and acquisitions in banking is laudable given the much-needed stability in the sector.

The move asserts CBK’s role in promoting financial stability as spelt out in its mandate given that it regulates a highly sensitive sector that holds more than Sh3.5 trillion in deposits of Kenyans and foreigners.

The CBK on Wednesday said the proposed acquisition of capital-constrained Jamii Bora Bank by tier-1 lender Co-operative Bank will diversify the business models of the two institutions and enhance the stability of the Kenyan banking sector.

The regulator also recently welcomed and approved the acquisition of Transnational Bank by Nigerian top lender Access Bank.

The moves are laudable given the past handling of troubled banks.

Depositors and investors in Kenya were rattled three years ago when the Central Bank took control of three mid-sized lenders, Chase Bank, Imperial Bank and Dubai Bank after they failed to meet their obligations.

The affected customers are yet to receive full compensation from these banks whose collapse dented the confidence in the sector and also weakened the corporate bond market.

Kenya’s banking industry is undergoing consolidation after the closure of the three lenders exposed weaknesses caused by lapses in corporate governance.

The CBK has been on the front row in support of having fewer, but stronger banks.

Kenya has 39 banks for a population of 47.56 million people meaning one bank for 1.22 million people. This makes it impractical for small players to effectively meet costs of operation given that more than 70 percent of deposits are with top eight lenders.

A comparison with the Nigerian market, now with 22 banks serving about 200 million people, means Kenya is overbanked.

The CBK should keep supporting the mergers and acquisition agenda so that weaker banks exit seamlessly without causing panic and loss to customers.

Nigeria once had 89 banks but the Central Bank of Nigeria supported consolidation, leading to stability. This same stability has seen Access Bank, United Bank of Africa and Guaranty Trust Bank, all from Nigeria, expand to Kenya.

Therefore, we laud the banking authorities for supporting a business model to identify struggling banks early for turnaround efforts before they collapse.