In what is probably the most disruptive development in recent Kenyan banking history, the Commercial Bank of Africa (CBA) and NIC Group are negotiating the terms of a merger.
The combined entity would become the third-largest lender by assets in Kenya. Mergers and acquisitions are not new to the banking sector.
The recent interest rate cap forced many smaller banks to consolidate with larger counterparts as they found it difficult to continue to operate. Before that, some mergers or acquisitions were the results of the remediation of collapsed banks that were put under receivership.
Some famous examples are KCB Bank committing to take over the struggling Imperial Bank in 2018 and CBA offering to buy out Jamii Bora Bank. Other times it’s just strategic – banks pool their strengths and use this combined muscle to create for themselves a competitive edge in the sector. The CBA and NIC coupling is a great example of this.
According to experts, a consolidated banking sector has the distinct advantage of stability and resilience, even during a harsh economic landscape. But how?
Cytonn Investments reports that Kenya is overbanked. Kenya currently has 39 banks, many of which are poorly capitalized, have a low return on equity, or account for less than 1 of the total market share. Because of these reasons, smaller banks are more likely to suffer from systemic risks and shocks, and this has an effect on the entire industry. When they consolidate through mergers or acquisitions, the resulting entities are better able to weather any unfavorable conditions.
The public relies on banks to provide essential financial services. In order to provide these services, banks need to be able to attract and retain deposits, which can only happen if they are able to maintain public trust. Therefore, when institutions consolidate and present a stronger image, members of the public develop deeper confidence in their stability, and they deposit their funds there enabling these institutions to operate.
Mergers and acquisitions do not just happen haphazardly. Oftentimes, banks and other financial institutions merge as part of a deliberate growth strategy. When organic growth is no longer happening at a rate that is satisfactory, it could be the perfect solution. It also helps to make operations more efficient because institutions leverage their individual strengths to achieve a common goal.
Consolidations require absolute transparency as well as supervision by regulatory bodies. This, in turn, reduces and could potentially end cases of corporate governance malpractice.
The banking sector lies at the center of our economy, and this is clear if we examine how other sectors rely on its products and services. Clearly, the sector and the country’s economy benefits from mergers and acquisitions. Thus, we can only hope that the current trend of consolidations persists.