NEWS WIRE: Kenya: Record Bank Expansion Strikes Chord with Savers

Source: Business Daily.

Original news wire available here.

Kenya, September 5- In possibly the most rapid take-off in the provision of financial services the world has ever seen, the number of Kenyans with bank and savings accounts tripled last year, from 3.3 million to 10.1 million.

Banking industry players attribute the growth, which took place in the last 18 months, to aggressive marketing of credit, greater availability of banking facilities and the introduction of a series of new products targeting low-income groups. As a result, 27 percent of Kenyans now hold accounts compared with nine per cent a year ago, according to the Central Bank.

Such growth has represented a windfall for the country’s financial institutions, attracting the attention of foreign banks shopping for acquisitions in the market. Last year, for instance, Barclays Plc reported that its Kenyan subsidiary had realised the greatest profit growth of all its international operations. On the homefront, rising interest in the formal financial services sector among Kenyans in the low income bracket has sent operators rushing to cash in on the growth.

This battle for control of the market saw the total number of bank branches increase from 575 to 740 in just 12 months, creating more than 8,000 banking jobs last year. More critical to those hunting for possible avenues of entry into the Kenyan financial market is that this boom saw total banking assets increase by 26 percent to USD 951.2 billion, while deposits rose by 18 percent to USD 705.2 billion, riding on the wave of robust earnings from trade and tourism as well as external donor inflows to non-governmental organizations and the Government. Total profits in the sector rose to USD 516 million (Sh35.6 billion) from USD 392.8 million (Sh27.1 billion) in 2006 and USD 298.6 million (Sh20.6 billion) in 2005.

The CBK says new university graduates as well as the more experienced management, supervisory and clerical staff benefited from this jobs market expansion representing a 39 percent increase to the 21,675 jobs that the industry had in the previous year. Banking industry statistics also show that this growth is driving a quiet maturity revolution that has seen the number of support staff decline to 292 from 1,102 in 2006.

Industry players say the decline is due to the growing popularity of outsourcing support services in the last four years and the adoption by most players of technology-based methods of doing business. Access to financial services is seen as a key catalyst to overall economic growth because of its role in facilitating business transactions.

CBK says that a financial access survey conducted last year revealed that 38 percent of the adult Kenyan population lacked access to financial services because of the high cost of maintaining savings accounts and other barriers to entry. Yet access to financial services is seen as key to the achievement of the Vision 2030 development agenda that aims at making Kenya a middle income country and a regional financial services hub.

Policy experts say increasing bank deposits and pooling of funds held by the pension managers and capital markets will be critical to increasing the national savings rate to the desired level of 30 percent of Gross Domestic Product.

Ongoing sector reforms such as enactment of the Microfinance Act are expected to usher in more players, increase competitive pressure and broaden the range of financial services to the un-banked.

“Microfinance plays a key role in increasing access to financial services thus empowering households to improve their welfare and manage risks,” says CBK.

Low income earners
Although ongoing banking sector growth is mainly driven by increased penetration among low income and rural population, policy analysts say lowering transaction costs could add impetus to the progress. Ms Linet Oyugi, a research fellow at the Institute of Policy Analysis and Research (IPAR), says most banks are capitalising on the high transaction frequency of low income earners to make unfair profits from high fees.

Ms Oyugi reckons that the high banking charges on low income savers coupled with the fact that the same account holders are not likely to borrow any significant business or personal development loans reduces the overall contribution of the banking sector to economic growth.
“Low income savers are known to make relatively more deposit and withdrawal transactions than high income savers, yet transaction charges apply uniformly to all account holders,” she said.

To tackle the problem, Ms Oyugi suggests that CBK should come up with regulations to cushion low income savers from high banking transaction charges and low deposit rates. This is however a concern that the CBK has raised in the past and moved to abolish ledger fees on savings accounts since May last year.

Concern over the high rate of bank charges is also the reason the regulator ordered the publication of bank charges and lending rates in the media to enhance competition in the market.
“Bank charges and lending rates are an issue of great public concern particularly as they are perceived to be generally too high.

The Central Bank, being mindful of these concerns, continues to enforce legislative provisions that require increases in bank charges and fees to be approved by the CBK,” the bank says in its current report. The report says that domination of the market by a few players compromises effective competition in banking institutions, and may require transformation of smaller banking institutions into larger and stronger ones with capacity to offer attractive and affordable financial products to retail and corporate clients.

About 13 of the 42 licensed commercial banks control 80 per cent of total bank assets, deposits and net advances; and 86 percent of total industry pre-tax profits. Interest rates offered on savings and other deposits within the banking sector also remain below the average rate of inflation.

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