Opinion
Consolidation is the future of banking in East Africa
![image](webadmin/images/eac.jpg-20220510102417000000.jpg)
From
our discussions with President Paul Kagame during my recent visit to Rwanda, it
became clear that African banks must play a leading role in making societies
more resilient and more responsive to the needs of the public.
Essentially,
we must reposition the banking and finance industry as a catalyst for economic
recovery, inclusive growth, and transformation. This starts with banks with
scale to finance key sectors of the economy.
The
post-Covid landscape for the financial sector has been about finding the right
balance.
Banks,
especially, are now navigating not only an economy in recession but one where
Covid-19 is disrupting business models and accelerating existing trends such as
digitalisation and the importance of environmental, social and governance
factors.
Simultaneously,
there has been an increased investment in technology and greater consolidation
in the industry.
In
banking, the scale has always been a key driver of value, but it is now more
critical than ever due to the need to invest in technology and digital
capabilities to emerging consumer trends and regulatory requirements.
The
need to gain financial strength through consolidation informed KCB Group's
#ticker:KCB acquisition of Banque Populaire du Rwanda (BPR). We have since
combined KCB Bank Rwanda and Banque Populaire du Rwanda (BPR) operations to
establish the second largest bank in Rwanda.
We
are now better positioned to play a critical role in supporting the economy by
focusing on inclusive growth, regional trade, economic opportunities, money
management, investment initiatives, raising living standards, and poverty
reduction.
Across
the world, the banking sector market landscape has rapidly changed over the
past two years. From inclination for incremental change and cautious
experimentation to a faster digital metabolism.
Today,
banks are evolving their prioritisation from a historically regulatory-response
strategy to a more proactive, strategic-growth plan, focusing on enhancing
efficiency, meeting emerging customer needs, and responding to changing market
dynamics.
Globally,
S&P Global Market Intelligence reports that merger and acquisitions
activities will continue at an unprecedented level this year in banking and
beyond.
According
to the report, there were more than $2.5 trillion of deals announced and the
combined deal value M&A activities in the U.S. bank mergers grew to more
than $61 billion at the close of November.
Consolidation
of the banking industry has become an economic necessity in the 21st Century.
Globally, small to medium-sized banks face chronic asset quality problems which
constrain their capital availability, casting doubt on their scalability and
business sustainability.
On
the other hand, larger financial institutions have proven to be better suited
to insulate asset quality stresses that would otherwise result in the
liquidation of small and medium-sized banks, causing major disruption within
the local financial sector.
Through
consolidation, the operational resilience of a banking sector is enhanced as
lenders benefit from economies of scale.
As a
result, the income stability of the regional banking sector is enhanced due to
the ability of larger banks to establish a more comprehensive geographical
presence, with more significant investments in product diversification and
process efficiency.
Consolidation
of the Nigerian banking sector in 2005 resulted in 25 banks emerging from the
original 89 that existed before the exercise.
The
fewer, stronger banks demonstrated the potential for the industry to drive
Nigeria's economic growth agenda through credit operations, as larger
institutions have been able to sustain significant increases in loans and
advances to economic agents.
In
India, challenges related to corporate governance and the ability to raise
adequate capital culminated in a 2019 ministerial decision to merge 10 smaller
public sector banks into 4 in a bid to create fewer and stronger global-sized
lenders.
On
the African continent, the key driving factor for bank consolidation in the
2020s has been the prevailing economic recession and slow recovery emanating
from the Covid pandemic and the ongoing war in Ukraine.
The
precarious state of the financial sector across Africa has propelled financial
lenders and regulators alike to increasingly consider consolidation to improve
the financial sector's operational resilience.
Furthermore,
a densely populated banking environment increases the strain on regulators to
ensure compliance, often resulting in small to medium banks engaging in
malpractice as regulators focus compliance efforts on the larger banks in the
market.
Consolidation
reduces the compliance burden of the regulators, ensuring a healthier and more
stable banking environment.
The
inception of the African Continental Free Trade Area has provided the optimum
backdrop for banks to support customers and businesses across the continent.
Consolidation
across the East African region has positioned KCB to offer easier access to
premium financial service offerings, dedicated relationship managers, and
capacity-building support to empower MSMEs to realise their true potential.
We
are better placed to provide world-class services to regional markets through
strategic consolidation, resulting in improved efficiency, enhanced service
delivery, product diversification and lower costs to our East African
customers.
Source:
www.businessdailyafrica.com