A Case for Bank Consolidation and Inclusive Lending

The Covid-19 pandemic has been a watershed moment for the banking industry. 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 prioritization 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. 

One of the most common approaches has been 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.

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.

Scale will be critical in order for banks to make significant investments in digital infrastructure and new technologies to meet emerging consumer needs  and to to navigate changing regulatory landscapes. 

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 operational resilience of the financial sector. The lack of product diversification in African banking has made it easier for larger banks to consolidate across borders due to the similar corporate structures and the increased efficiency with which larger banks are able to provide similar, reliable and more efficient services compared to their smaller competitors. 

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 the KCB Group to support customers and businesses across the continent as inter African trade is set to boom.

With the size of its loan book and portfolio, the Bank is better positioned to serve the region's financial needs than the smaller banks, which do not possess the geographical mobility to provide their customers with a streamlined banking experience across multiple jurisdictions. Leveraging on our expansive network of Branches, ATMs, and Agents, KCB is primed to service our customers within and beyond the East African region, providing a truly borderless banking experience.

As we expand into both Ethiopia and the Democratic Republic of Congo (DRC), we aspire to provide 100 million unbanked individuals with access to modern and inclusive banking. With a population growth rate of 3%, compared to other developed countries below the 1% mark, coupled with increasing financial inclusion and improved uptake of financial services products, the East African region offers an appealing proposition for long term investors looking to take advantage of the attractive valuations. 

Contributing between 35-50% of the GDP in Africa, but hampered by the limited access to financing options, we believe MSME's are the bedrock upon which African economies shall prosper. 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. 

At KCB, we seek 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. Consolidation has been instrumental in ensuring that KCB has sufficient resources to maintain and to continue to expand our numerous programmes as we seek to create shared value in the communities that we operate in through the KCB Foundation.