Kenyan Banks turn to digital banking amidst layoffs

November 1, 2016
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NAIROBI, Kenya, Nov 1 – Kenyan Banks are expected to close branches and pursue a digital strategy raising fears of downsizing staff.

According to Standard Investment Bank Research, banks are looking at thinner margins following the passing of the Banking Amendment Bill, forcing financial institutions to pursue a technology driven strategy to lower costs.

“Presently, Equity Bank has enacted a freeze on opening new branches and is instead using its mobile-based platforms as well as agencies to recruit new clients. Other lenders such as Sidian Bank and Family Bank are planning to cut staff in order to reduce cost of operation,” states an analyst at SIB.

Sidian Bank plans to send home at least 108 of its 506 staff at a one-off cost of Sh70 million while Mid-sized Family Bank was the first to declare a voluntary retrenchment programme but did not disclose the numbers targeted.

Meanwhile, Pan-African lender Ecobank has announced it will close nine branches, out of its 29 branches, over the next seven months.

According to management, the decision was made early this year with the bank planning to pursue a digital strategy, with similar changes planned across the other 36 countries it operates in.

Its clients will now be recruited and served across its digital platforms such as mobile and internet platforms.

The bank is currently in the process of selling its head office building based in Nairobi’s Central Business District.

A recent World Bank report on Kenya dubbed Beyond Resilience, banks’ average net interest margins are likely to decline by up to 430 basis points from the 11.4 percent they averaged in June 2016.

This will impact all categories of Kenyan banks. However, given lower profit margins among Tier 3 banks relative to Tier 1 banks, they are likely to be hit the hardest.

Reflecting the impact of the new law on bank profitability, some 15 percent of value of bank stocks (5.4 percent of the all share index) was wiped-off within a month of the passing of the Banking Amendment Bill.

Further, the law is likely to reduce the ability of banks to differentiate creditworthiness and price accordingly, leading to a more homogenous product, reduced competition and shutting out of certain categories of borrowers.

The WB report reckons consolidation of the banking sector may occur, as most of the smaller banks will face even higher challenges given their relatively high cost of funds.

“When combined with more stringent capital requirements, the likelihood of consolidation is very high. This will potentially increase the market share of SACCOs and Micro-Finance Institutions (MFIs), who are not subject to the same interest rate restrictions,” the report indicates.

There are also concerns that Banks could create special purpose vehicles outside the purview of the Banking Act, freeing them to charge interest rates without the limitations of statutory cap.

Banks are expected to also divert more of their assets to government securities. Further, banks with a regional presence will likely reduce Kenyan exposure in favor of other countries.

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