Investing in Kenya

Spotlight on Kenya

Below is an interview session with Jimmy Masinde, Director, Strategy and Operations, Management Consulting, KPMG Kenya.

What is the size of your country’s Financial Services industry?

Kenya’s financial services industry is currently one of the fastest growing not only in the East African region but the continent with the Nairobi Securities Exchange (a financial assets and securities market) being ranked fourth in Africa. Kenya’s financial sector scores relatively well against the principles outlined by the Centre for Global Development. Kenya’s financial sector is among the most sophisticated on the continent. The information and communications technology (ICT) sector support the financial services industry, especially in terms of mobile phone banking.

The financial sector grew slower in 2012 to post a growth of 6.5 per cent in 2012 compared to a 7.8 per cent growth in 2011, similarly, the sector’s contribution to GDP decreased from 6.3 per cent to 5.2 per cent in the same period.

The Kenyan Banking sector which is the biggest provider of financial service, registered improved performance with the size of assets standing at Ksh. 2.4. trillion, loans & advances amounting to Ksh. 1.4 trillion, while the deposit base stood at Ksh. 1.8 trillion and profit before tax of Ksh. 28.2 billion as at 31st March 2013. During the same period, the number of bank customer deposit and loan accounts stood at 17.3 million and 2.3 million respectively. The total banking assets for Africa are USD 1280 billion. Eastern Africa banking accounts for 5% of these assets (62 Billion). It also accounts for 31% of the regional GDP.

How significant is the industry in the region and Africa as a whole?

Kenya is the regional hub for trade and finance in East Africa and the natural entry point to the region. The East African economy is anchored to the financial services industry in Kenya, which is fast growing and attracting foreign direct investments into the region.

Nairobi is a major financial center of Sub Saharan Africa. The sector plays a critical role in the development process. In Vision 2030, for example, the financial sector is expected to drive high levels of savings and finance Kenya’s investment needs.

How has the industry evolved and what are the key developments?

Development and diversification in delivery channels – Mobile network operators, and financial institutions have responded rapidly to these new powers. Between 2007 and 2012, Safaricom, has rolled out more than 40,000 mobile payment agents nationwide. Since 2010 a total of 10 banks yans now have a huge range of financial service options, and understanding the financial system has become much more challenging. This has led to the creation of a national financial education strategy, and a number of financial education programmes supported through donor programmes including the Financial Education Partnership and the MasterCard Foundation.

The country’s banking sector has recorded exponential growth with bank branches rising from 534 as at December 2005 to more than 1,000 in 2011. The number of rural branches has grown by more than 150 per cent compared to over 70 per cent growth in urban areas over the same period, which has highly boosted financial inclusion have connected more than 10,600 bank agents. Microfinance institutions have also been quick to adopt mobile payments channels, usually to enable the repayment of loans. One institution Musoni Kenya, has decided to operate only through the With lower cost delivery channels being introduced, increased levels of product innovation and institutional transformation of microfinance institutions and SACCOs, Ken in the country.

A significant recent development in the banking sector has been the licensing of agent banking. As at the end of 2011, eight commercial banks had 9,748 licensed and active agents who facilitated more than eight million transactions worth Kshs43 billion ($506 million). Some 8,000 agents had been licensed in 2010, a factor that is widening the gap in financial access between Kenya and its East African Community partners.

The FinAccess Survey, 2013 results bears witness to the above gains made in enhancing the reach and coverage of financial services to Kenyans. It shows that the proportion of the adult population using formal financial services rose to 66.7% in 2013 from 27.4% and 41.3% in 2006 and 2009, respectively. The proportion of the financially excluded on the other hand has been falling steadily from 39.3% in 2006 to 31.4% in 2009 and now stands at 25.4% of the adult population. Equally and more striking, the proportion of the population using informed financial services has declined to 7.8% from 35.2% in 2006 and 26.8% in 2009. These findings demonstrate impressive achievements and vindicate policy strategies and reforms undertaken by Government and initiatives and innovations by the financial sector players’ as having helped expand financial inclusion.

How has regulatory change impacted on this sector?

The Government has reformed banking to make it internationally competitive. In 2007, the Ministry of Finance proposed to raise bank capital from Sh250 million ($2.94 million) to Sh1 billion ($11.8 million) by 2012.

Legislation that have been introduced to enable microfinance institutions to accept deposits (the Microfinance Act – Act No.19 of 2006), and to strengthen and regulate Kenya’s deposit taking credit unions (the SACCO Societies Act – Act No.14 of 2008) have increased access to financial services.

Credit Bureau regulations introduced in February 2009 have helped reduce credit risk in the sector. Policy makers anticipate that a reduction in credit risk will enable more competitive lower risk based pricing to be introduced, and for interest spreads to reduce.

Policy and regulations on M-Pesa have promoted money transfer products to the millions of Kenyans.

What are the current issues facing this sector?

Kenya has significant problems regarding lax banking regulations and corruption. Political stagnation between the country’s power-brokering fractions has prevented the government from taking action on consumer protection policies. The status of client protection in Kenya is very weak due to little or no action taken by government, non-government, and banking entities. There has been action against corruption, with a commission passing a general code of conduct for co-operative societies, but the code is vague and falls short of creating a consumer protection framework.

Transparency is therefore an issue that has not been entirely addressed. Despite the increased access to financial services, the cost of financial products still remain high and therefore not affordable.

Whilst on the surface policy and legislation is creating an environment where there is increased capacity, and greater security and soundness within the financial system the presence of large dominant players such as Equity Bank, Kenya Commercial Bank and M-Pesa on mobile payments – may lead to inefficiencies and / or monopoly effects.

Information technology is a tangible barrier to entry, most institutions have neither the institutional capacity nor the level of banking systems to compete with larger institutions who can offer thousands of points of access – and new innovative products and services.

What is the outlook for the industry and what are the key opportunity areas in the sector?

Kenya’s development blue print, Vision 2030, covering the period 2008 – 2030, envisages the financial services sector being transformed into a vibrant and globally competitive sector that will drive high levels of savings to finance the country’s investment needs. The transformation entails doubling deposits mobilization from 44% to 80% of GDP and enhancing growth of savings channeled into productive investments from 14% to over 30%. This goal can be achieved by addressing the Vision’s three core objectives, namely: enhancing financial system stability, efficiency, and expanding financial access and usage.

With more foreign institutions choosing Kenya as their regional base, the country draws closer to realizing its aspirations of being a regional financial hub as envisaged under the Government’s economic blueprint, Vision 2030.

How would you assess the presence of regional and international banks in the sector?

Kenya has 44 banks; 31 are locally owned and 13 are foreign owned. This represents around 30% of the total market share. Kenya continues to attract growing international interest from renowned international financial institutions as a preferred base for their regional operations. This presents unique opportunities for the Kenyan economy to be part of increasingly global financial markets.

The Kenyan banking sector has continued to attract increasing interest from Pan-African, regional and global banking brands. The increasing interest supports Kenya’s aspiration under Vision 2030 to make Kenya an international financial centre. The entry of foreign banks into the Kenyan financial sector will promote competition and diversity of the financial products and services on offer.

What are your key winning strategies?

  • Making sure our proposals are responsive to the requirements of the potential clients.
  • Ensuring that we deliver value and quality to the client – this opens doors to more downstream and referrals.
  • Our involvement in thought leadership materials that help showcase our capability and also identify key issues and challenges that are faced by FS companies. (e.g the Banking Industry customer satisfactions Survey)
David Okwara

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