S&P sees banks merging as competition, regulation intensify

Money Markets

The Central Bank of Kenya. S&P noted that although CBK has developed an effective track record of intervening to provide liquidity through open market operations, the conditions for accessing the funds are strict. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• S&P says that the sector remains moderately unstable, and with more than 40 banks it remains overbanked and fragmented taking into account that the 10 largest banks collectively account for less than 70 per cent of the sectors assets.

Kenya’s banking sector is likely to see consolidation due to increased competition between lenders and tighter regulatory supervision, global ratings agency Standard & Poor’s (S&P) says.

S&P says that the sector remains moderately unstable, and with more than 40 banks it remains overbanked and fragmented taking into account that the 10 largest banks collectively account for less than 70 per cent of the sectors assets.

“Given the increasing interest in Kenya from regional banking groups and the ongoing regulatory changes, we believe competition could intensify, possible leading to consolidation,” said S&P in their latest Kenyan banking sector risk assessment report.

S&P also notes that the banking sector carries funding risks given their reliance on short term retail deposits to finance their longer term lending business.

Use of short term deposits to finance the lending book exposes a lender to liquidity risks, with S&P noting that although CBK has developed an effective track record of intervening to provide liquidity through open market operations, the conditions for accessing the funds are strict.

“Generally, Kenyan banks do not rely on external funding despite the country having an increasing number of foreign owned banks. We expect credit growth to exceed deposit growth as the economy continues to expand, which could place additional strain on banks funding and liquidity profiles,” said the ratings agency.