Consolidation in Kenya’s Banking Sector Set to Continue

By Soko Directory Team / February 11, 2019 | 7:31 am

The pace of consolidation in the banking sector has picked up and is likely to continue as banks merge to form strategic partnerships, leading to the acquisition of struggling banks especially those that do not serve a niche thus resulting to a more stable and safer banking sector.

With acquisitions currently happening at cheaper valuations to historical levels, well-capitalized players are expected to take advantage and ensuring that several deals are completed, according to Cytonn Investments’ weekly report themed ‘Consolidation in Kenya’s Banking Sector to Continue’.

Over the last 8-years, there have been various consolidation activities in the banking sector, as banks either acquire smaller banks or merge and form strategic partnerships with other banks to form relatively larger companies.

Consolidation activity has picked up in the recent past as smaller banks that have struggled to operate under the interest rate cap regime are acquired by their larger counterparts, while some of the banks have been forming strategic partnerships.

Some of the consolidation activity has also been driven by remediation of collapsed banks that had been under receiverships, such as Imperial Bank Ltd, and Chase Bank Ltd.

Two deals are already in the pipeline in 2019, with Commercial Bank of Africa (CBA) issuing a cash buy-out offer of 1.4 billion shillings to Jamii Bora Bank and CBA and NIC Group issuing a merger notice.

Types of Consolidation Arrangements and the Impact

The term consolidation is loosely used to describe the combination of company assets and possibly even the liabilities, through various types of financial transactions. Key examples include


A merger is an agreement that combines two existing separate companies into one new entity. Most mergers are done to gain market share in the industry, leverage on the economies of scale to reduce costs of operations, use the relatively larger capital base to expand to new territories or product lines, unite common products, with all of these aimed at obtaining a competitive advantage, and ensuring sustainable growth.

After a merger, issued shares of the new company are distributed to existing shareholders of both original businesses in pre-agreed proportions. For example, the transaction between the NIC Group and CBA is a merger.


An acquisition is a transaction where one company purchases a majority (more than 50 percent) or (in some instances) all of another company’s shares in order to take control.

As part of the exchange, the acquiring company often purchases the target company’s equity, which allows the acquiring company to make decisions regarding the use of the newly acquired assets with/without the approval of the target company’s shareholders owing to the majority holding in the target company.

Companies often acquire other companies when they intend to achieve quick inorganic growth, which may be more attainable and does not pose any additional inefficiencies and logistic constraints that may arise from organic growth. For example, SBM Bank Kenya’s acquisition of Chase Bank Ltd.

Tender Offers

Tender offer refers to when one company offers to purchase the equity directly from the shareholders of the target company, often at a premium, bypassing the target company’s board of directors and management.

Tender offers are particularly common in listed companies where the acquiring company issues a takeover bid, subject to the approval of the target company’s shareholders. If there are no dissenting shareholders, tender offers have often resulted in acquisitions.

Management Acquisitions

Management acquisitions refer to transactions where a company’s management team purchases the assets and consequently the operations of the company they manage. In this type of transaction, the management team pools resources, and acquire a stake or even the entire company. The management may use their own individual financial resources or seek backing from external financiers such as private equity financiers, and financial institutions.

 Recent Consolidation in Kenya

In the recent past, consolidation has picked up in Kenya’s banking sector, as the relatively smaller banks become acquired by larger banks while relatively larger banks merge and form partnerships. 

The acquisitions have picked up, as the smaller tier 2 and tier 3 banks have found it difficult to operate in Kenya due to:

  1. The implementation of The Banking (Amendment) Act 2015, which saw the capping of interest chargeable on loans to 4.0 percent above the Central Bank Rate (CBR). This compressed their net interest margins, as they were unable to price loans higher for their riskier clients, and yet they have higher costs of deposits, which consequently saw most of them struggle to retain profitability,
  2. The implementation of the law saw the larger banks venture into the small banks’ niche markets such as Small and Medium Enterprises (SMEs) banking, and consequently, most have struggled to operate on declining top-line revenue, leading to increased operational inefficiency, and operating losses, which has depleted capital,
  3. A tough operating environment caused by an abrasive political climate and prolonged droughts has made it even more difficult to operate, as it consequently leads to a deterioration in asset quality, and,
  4. The failure of the Imperial Bank prompted a flight to safety, making it hard for tier 2 and 3 banks to operate. This has led to the acquisition of tier 3 banks such as Habib Bank Kenya by Diamond Trust Bank (DTBK), and mergers of tier 2 and tier 1 banks, such as the NIC and CBA deal.

READ MORE: NIC, CBA Confirms Merger for a Bank with Assets Worth Over Ksh. 444 Bn

In order to maintain a competitive edge and fast-track their growth, banks have either been acquiring the smaller counterparts, forming strategic partnerships, or merging together, so as to leverage on the synergies created to provide an adequate capital base, which will drive long term growth.

According to Cytonn, increased consolidation in the sector should see the formation of banks that have an adequate capital base, which will provide them with the requisite cover to partake in core banking activities, thereby catalyzing economic growth and development in the country.

Furthermore, with an aggregate adequate capital cover, the banking sector will remain resilient to any internal or external systemic shocks that may affect the sector. Thus, it would be ideal for the sector to have even fewer, but stronger players.

Cytonn maintains its position that Kenya remains overbanked when compared to other major economies in Africa, and that there is the need to trim the number to fewer more stable players.

Cytonn’s View on Banking Sector Consolidation

As evidenced by the banking sectors in countries such as Nigeria, Ghana, and the US, consolidation is always credit positive as it:

  1. Enhances the resilience of the sector to both external and internal shocks,
  2. Enhances the public’s confidence in the sector mainly in terms of deposit security,
  3. Enhances the entities’ capacity to conduct their core banking function of financial intermediation, which in turn pivots economic growth, and,
  4. Enables more oversight into the sector’s activities thereby reducing, and possibly eliminating cases of corporate governance malpractice.

Cytonn came up with the following criteria that would be used by larger banks in their selection for acquisition targets to grow their market share :

  1. Poorly Capitalized Banks – This includes challenges in meeting the statutory requirements, including capital adequacy and liquidity. With the injection of fresh capital, the acquiring entity can bolster the capital position of the bank, thereby meeting all statutory requirements,
  2. Locally owned Tier III banks– Since the banks are locally owned, the banks most likely have a particular niche or market segment that they serve in Kenya’s banking space. In addition, their market share is below 1.0 percent of the total market by deposit, indicating that they are largely non-competitive but there is lots of market share to potentially grow into and merge with existing business,
  3. Banks with a Low Return on Equity – This will favor the acquiring foreign entity as shareholders would be more willing to sell their stake owing to the low profits or operating losses possibly occasioned by highly inefficient operations, and cash out, as opposed to banks that deliver a high return on equity,
  4. Banks with High Non-Performing Loans – This is an area where the acquiring foreign entity can improve with their expertise and move with speed to rectify, and also restructure their loan book and debt, and,
  5. Banks with Shared Common Significant Shareholding – Local stable banks will also seek to acquire banks aligned with their strategies, and with a large common shareholding, especially banks where the government holds significant stakes.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: and on Twitter:

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