Half of the top 20 African banks are building a multi-billion-shilling war chest for Kenya’s banking industry in the race to grab a share of one of East Africa’s most profitable financial services markets.
The lenders are injecting fresh capital into their Kenyan subsidiaries, seeking stakes in local banks or closing buyout deals, enabling local shareholders to pocket billions of shillings in the high-stakes battle.
FirstRand, the second-largest lender in Africa, is the latest top bank on the continent to declare its intention to make an acquisition in Kenya, with a preference for a mid-sized bank.
It joins a growing list that includes Standard Bank Group, Nedbank, Zenith, CIB Egypt, Access Bank and Absa Group, whose members are scouting for stakes to acquire or injecting additional capital to deepen their presence in the country.
Kenya’s appeal lies in its gateway role in the East African Community, a fast-growing bloc whose economies are expanding by at least 5 percent a year.
Kenya’s move to raise banks’ minimum capital from Sh1 billion in 2024 to Sh10 billion by 2032 is expected to spur further consolidation in the sector, which also appeals to lenders as a hub for travel and regional bank headquarters.
Relatively solid financial regulation, easy repatriation of dividends and the freely traded shilling add to the attraction.
“One of the major reasons is that the Kenyan market still provides exceptional returns. This makes Africa’s top banks seek growth beyond their sluggish home markets, especially South African banks,” said Shadrack Manyinsa, senior research analyst at Pergamon Investment Bank.
“The review of minimum capital to Sh10 billion by 2032 continues to create some acquisition windows and a need for some of these large African banks,” he added.
In the last five years, Kenyan banks have delivered average returns of 23 percent, while South African lenders averaged 16 percent.
The National Treasury’s bid to raise funds through the sale of strategic assets also opens a window for deal-making by Africa’s top banks.
The government owns two small lenders, Development Bank of Kenya and Consolidated Bank of Kenya, while also holding a 19.7 percent stake in KCB Group, the country’s largest bank by asset base.
Analysts reckon the Kenyan market is a hard nut to crack, with some continental giants unable to replicate their domestic success in Kenya.
Despite having huge capital at their disposal to expand their presence in the country, most continental banks are still classified as Tier III lenders years after entering the Kenyan market.
“Foreign lenders face strong competition from leading domestic incumbents, largely because of their deep branch, agent and mobile money networks built over decades, entrenched customer relationships, trust, and faster local execution,” said Melodie Ndanu, a research analyst at Standard Investment Bank.
Some of the top 20 African banks whose subsidiaries are classified as small banks in Kenya include Bank of Africa, Guaranty Trust Bank, CIB Egypt, United Bank of Africa (UBA) and Access Bank.
Competition from the country’s entrenched domestic lenders is limiting their returns, as incumbents, including Equity Group, Cooperative Bank and KCB Group, leverage large customer bases, regional reach and mobile platforms.
Nigeria’s Access Bank bought National Bank of Kenya from KCB Group last year with plans to merge the two institutions to create a more formidable player in the Kenyan market.
Nedbank has sought to circumvent the process of growing organically by buying into a large bank in the market. Nedbank, ranked the fifth-largest lender in Africa, is in the process of completing a 66 percent acquisition of regional listed lender NCBA Bank in a Sh110 billion deal.
Analysts say an acquisition of another large bank in the Kenyan market would come with a heavy premium, which could turn off suitors.
The top African lenders have large balance sheets, giving them the financial muscle to acquire local Tier I banks, whose size is relatively small compared with that of the continental giants.
Standard Bank Group, ranked the largest bank in Africa, has Tier I capital of $16.1 billion, which is more than double the combined total of Kenya’s top five lenders at $7.4 billion.
FirstRand’s full-year profit of Sh309.4 billion was higher than the country’s total banking sector profit before tax of Sh306.3 billion.
“Kenyan banks aren’t easy targets; it depends on the target acquisition’s control premium, profitability, customer franchise, strategic imperatives, shareholding considerations, and integration capacity,” said Ms Ndanu.
She, however, noted that foreign banks still have various strengths that can help them serve their target clientele, such as international and pan-African networks, capital and funding capacity, and robust corporate and institutional banking capabilities.
“Kenya is not an end in itself, but a platform for East Africa,” said CIB Egypt, the eighth-largest lender on the continent.
“We are in early conversations with regulators about expansion into neighbouring markets, and we expect Kenya to serve as the hub for a broader regional presence.”
CIB Egypt entered the Kenyan market in 2020 through the acquisition of a 51 percent stake in the small lender Mayfair Bank for Sh4.55 billion ($35.3 million). In 2023, it acquired the remaining stake in a transaction valued at Sh5.16 billion ($40 million).
The Egypt-based lender last year injected an additional Sh1 billion into the bank, underlining its commitment to growing the local lender, which is focused on exploiting the Egypt-Kenya trade corridor.
Nigeria’s top-ranked lender, Zenith Bank, acquired Paramount Bank, a small lender in Kenya, early this year to establish its presence in the region.
“The business combination positions Paramount Bank Limited as the cornerstone investment vehicle for Zenith Bank Plc’s East African expansion,” said Paramount Bank.
Entry into Kenya serves as a launchpad for South and West African banks seeking to access the wider East African market, which offers greater growth opportunities.
The resource-rich Democratic Republic of Congo has been a good hunting ground for Kenyan banks that have expanded into the country.
The bank has indicated that it is also weighing entry into the market through other financial services, not necessarily banking.
This means FirstRand could also be eyeing an entry through investment banking, insurance, fund management and other financial services.
Analysts reckon Kenya’s wealth management sector has picked up in the last few years, making it a good option for entry.
Standard Bank Group, which operates in Kenya as Stanbic Holdings, has stated that it is looking for expansion opportunities in the country after missing out on the acquisition of NCBA Group to its compatriot Nedbank.
Absa Group had declared its intention to increase its stake in the Kenyan operation to 85 per cent from 68.5 percent.
The group’s offer to buy additional shares from existing shareholders at the Nairobi Securities Exchange (NSE) flopped, with investors offering it an additional 3.5 percent stake against a tar-get of 16.5 percent, despite the group sweetening the deal with a premium on the share price.
The group has maintained its intention to increase its stake from the new 72 percent to the desired 85 percent.
Moroccan Bank of Africa is set to inject more capital into its Kenyan business, which is operating with thin capital adequacy ratios.
Groupe Banque Populaire, the second-largest lender in Morocco, has previously expressed inter-est in entering the Kenyan market through an acquisition.