Attractive returns luring foreign banks to Kenya

More foreign banks are set to enter Kenya lured by attractive returns on investment amid mergers and acquisitions, a report shows on Monday.

The assessment by Nairobi-based investment firm Cytonn noted that at least two foreign banks are awaiting to start operations in Kenya in the coming months, with others seeking entrance following the lifting of a moratorium by Central Bank in February.

"Kenya's banking sector has amongst the highest return on equity (ROE) in the world, with listed banks' ROE standing at 20 percent, attracting foreign investors. Going forward, we expect to see more foreign banks targeting the Kenyan banking sector," said Cytonn.

Dubai Islamic Bank and Mayfair Bank are the two foreign institution's set to be licensed to start operations in the East African nation.

Some of the foreign institutions have chosen to set up new operations while others are taking advantage of acquisitions and mergers taking place in the country amid changing business environment.

In the last one year, Kenya has witnessed a number of acquisitions in the sector, which include Giro Commercial Bank being acquired by I&M Holdings while Oriental Commercial Bank was acquired by Bank M of Tanzania.

On the other hand, Fidelity Commercial Bank was in the process of being acquired by SBM Holdings of Mauritius, subject to regulatory approvals in both countries.

"This year, Diamond Trust Bank Kenya has already announced plans to acquire Habib Bank Limited setting the platform for more consolidation, with the acquisition subject to regulatory approval in both Kenya and Pakistan. These cases of consolidation in the banking sector will lead to fewer, but larger banks, which are more stable and can, withstand shocks in the economy," said Cytonn.

The firm reckoned that consolidation in the sector is going to continue as weaker banks are acquired by the more stable banks.

"The sector is adopting a more prudent banking approach, while key issues such as asset quality and the regulated loans and deposit pricing framework prevail in this operating environment," noted Cytonn.

There have been a number of regulatory developments in the Kenyan banking sector that have led to a tough business environment for banks.

Top on the list is the law capping interest rates on loans, which allows banks to charge interest at no more than 4 percentage points above the Central Bank Rate (CBR), now at 10 percent.

The banking sector also welcomed the International Financial Reporting Standard, a new accounting standard that requires banks to increase their loan loss provisioning. Endit