Kenya forced Chase Bank into an “arranged marriage”—but it still has way too many lenders

The doors will be open again next week.
The doors will be open again next week.
Image: Reuters/Siegfried Modola
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Chase Bank, a mid-sized Kenyan lender whose recent struggles have inspired fear in the country’s banking sector, will reopen in a week under new management. KCB, Kenya’s largest bank by assets and one of Chase’s main rivals, will now manage the lender, which was placed under receivership earlier this month.

That should be welcome news for depositors of Chase Bank—mostly women, small businesses, and young professionals—who have had their accounts frozen. One woman in Nakuru threatened to commit suicide if she lost her money.

According to a statement released today (pdf) by the the Central Bank of Kenya (CBK), branches will open on April 27, when they ”may initially offer limited banking services. Customers will have immediate access to their deposits up to a maximum of 1 million Kenyan shillings ($10,000).” A total of 167,290 accounts, or 97% of account holders, will be able to access their funds in full.

Analysts believe this will inject much-needed confidence into the banking sector. “The decision to open Chase under KCB’s management is strategic in that it will improve the profile of the troubled lender by capitalizing on the sound reputation of KCB,” said Eric Munywoki, head of research and business development at Sterling Capital. ”If KCB wasn’t involved in the management of Chase, a lot of depositors would have fled the mid-sized lender had it been let to open on its own.”

Chase was the third bank to be placed under management of the central bank in less than nine months. After social media reports questioning its stability circulated widely, causing a run on its branches, the bank was placed under receivership on April 7. The bank had misrepresented its financial reports by concealing non-performing loans and lending 16.6 billion Kenyan shillings (US$166 million) to several companies, many of them linked to the bank’s directors.

Still, Chase is not fully out of the woods. The change in management does not amount to a takeover by KCB just yet. “KCB will undertake a detailed due diligence review of [Chase bank]. This will inform decisions relating to KCB’s interest in a majority stake,” the banking regulator said.

KCB’s takeover of Chase may be the beginning of the much-discussed consolidation of Kenya’s banking sector. Regulators and analysts have long talked about the need for whittling down the number of banks in the country. With a population of 45 million, Kenya has 43 banks (including those in receivership). In comparison, South Africa, with a population of 52 million, has 19 banks, while Nigeria, with a population of 180 million, has just 22 banks.

This has made competition even stiffer in Kenya’s banking sector, with the CBK urging small banks to merge in order to reinforce their capital base. John Gachora, the managing director of NIC Bank, a mid-sized Kenyan lender, has suggested that the CBK force banks into “arranged marriages” of convenience to make them more stable and to restore confidence in the country’s banking sector. Gachora said, “We should start saying ‘you and you must marry, if you don’t marry we’ll take away your operating license.’”

Minimum capital requirements for Kenyan banks are low compared to those in Nigeria and South Africa. This has left smaller banks especially vulnerable when depositors seeking higher returns go elsewhere. Depositors, worried about the health of these smaller lenders, are increasingly taking their money to larger, tier-one banks. Analysts say that the slow demise of small Kenyan banks is serving as a wake-up call for the need to consolidate the banking sector.

“We expected banks to have started the consolidation process in 2012, when minimum capital requirements were increased to 1 billion Kenyan shillings [$10 million] from 700 million Kenya shillings, but that never happened. But, I think this is the right time to continue the conversation on bank consolidation again,” says Munywoki.

Kenyan officials have called for capital requirements to be raised again from 1 billion to 5 billion Kenyan shillings by 2018, a move that could further hasten the consolidation process. Analysts at Cytonn Investments have listed 20 banks that it believes should be bought out by their larger peers.

“The proposal to increase the minimum core capital requirements to run a bank in Kenya from 1 billion Kenyan shillings to 5 billion could be a reality,” said George Waithaka, a senior corporate finance analyst at Mentoria Consulting. “Perhaps the time to consolidate the banking sector in Kenya has come, to ensure long-term stability in the financial system.”