Nairobi emerges as the Financial Hub of East Africa

Nairobi has emerged as the financial hub of the East Africa Common market bloc, we can report. Thanks to the rapid expansion of homebred multinational banks and the consolidation of the management of foreign transnational banks from Nairobi

The foreign banks have actually lost their dominance of the local financial market both in profitability and branch network in the region to indigenous banks.

The indigenes have since the mid-2000s taken the foreign banks head on in terms of branch network expansion and innovation. This has made the Kenyan financial market and by extension East African financial market the pitch for stiff competition driven by Kenyan banks.

The front runners are Kenya Commercial Bank, the oldest bank in the region, and Equity Bank, ironically the youngest and the most aggressive bank in the region.  In fact, Equity is now the largest bank in sub-Saharan Africa in terms of customer base, boasting of a whopping 6.7 million accounts.

The Multi national banks- Barclays Bank and Standard Chartered – are losing out in terms of profitability. In the first half of this year, Barclays lost the poll position posting someUS$60.4million in pre-tax profits. The top slot went to Equity Bank which bagged some US$65.6 million. Kenya Commercial bank came second posting $ 63.3 million. Standard Chartered, which has traditionally held the second position after Barclays, came a distant fourth earning $27.8 million. This, it appears, will be the trend up to the end of the year with minor changes.

In terms of capitalization, Barclays, which was once the leader comes a poor second after Equity Bank, which boasts of a US$340 million war chest compared to Barclays’ US$190 million. KCB has been to the capital market recently seeking to raise it war chest to expand into the region.

At home the two banks lead in innovation. They have taken advantage of the entry of Fibre Optic into Kenya to expand their customer base without expanding their branch network. They have launched Agency banking where business people are licensed to perform banking functions for a commission.

It is expected such innovations will soon be licensed elsewhere in the trading bloc. On this score the foreign multinational banks were caught napping and are yet to wake up.

The Foreign transnational banks brought this dismal show upon themselves. In the 1990s, when they called the shots, they trimmed their presence in the market by discarding retail banking. Accustomed to earning billions from doing nothing, the banks closed down some 230 branches across the country, saying they were unprofitable.

At that time, between 1997 and 2001, the banks made billions from investing in government securities.

The dejected retail customers trooped to indigenous banks such as Kenya commercial bank, and building societies such as Equity Building Society, Family Finance and others. When these institutions converted into banks in 2005, the battle lines were drawn. Soon Equity was buying out town and setting up braches in the low-end areas. The gamble paid off and soon, it was announcing profit growth rate in triple digits while the majors were stuck in single digits.

The majors woke up to the reality. And in 2006/7, they began gunning for the retails markets. Gone were the days when the major banks treated potential customers as a nuisance. They had to compete with street hawkers for space on the street as the drive for new customers heated up.

Robust economic growth spawned increased demand for banking services including credit. This, coupled with good house keeping among the banks saw the previously sick men of the banking industry namely; Kenya Commercial Bank (KCB) and National Bank (NBK) return to profitability.

Coupled with the rapid growth of newly licensed and other small banks, pressure grew on the major banks which moved quickly to retain their market share and probably expand resulting in hawking of loans to the retail market.

The battle then spread beyond the Kenyan borders into the East African region as indigenous Kenyan banks expanded out of the domestic market. This market was previously dominated by both Barclay’s and Standard Chartered.

KCB is now the dominant bank in the region boasting of a total of 221 branches in the region including; 11 branches Tanzania; 14 in Uganda, 19 in South Sudan and Nine in Rwanda. Equity boasts of 38 branches in Uganda and four in South Sudan. It has its eyes trained on Tanzania and Rwanda. It would be interesting to watch as the battle for a bigger share in the regional financial market shapes up.

To counter the aggressive expansion of the indigenous banks, the Trans-nationals which are already present in the region are consolidating the operations in the region to be managed from Nairobi. The city has become truly the financial capital of the region.