Consolidation is the future of banking in East Africa

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Consolidation is the future of banking in East Africa


From left to right: Presidents Uhuru Kenyatta of Kenya, Paul Kagame of Rwanda and Félix Tshisekedi of the Democratic Republic of Congo (DRC) at a ceremony marking the official admission of the DRC into the East African Community East (EAC) on April 8. PICTURE | AFP

From our discussions with President Paul Kagame during my recent visit to Rwanda, it became clear that African banks must play a leading role in making societies more resilient and responsive to the needs of the public.

Essentially, we need to reposition the banking and finance sector as a catalyst for economic recovery, inclusive growth and transformation. It starts with large-scale banks to finance key sectors of the economy.

The post-Covid landscape for the financial sector has been about finding the right balance.

Banks, in particular, are now navigating not just an economy in recession, but one where Covid-19 is disrupting business models and accelerating existing trends such as digitalization and the importance of environmental, social and governance factors. .

Simultaneously, there has been increased investment in technology and greater consolidation in the industry.

In banking, scale has always been a key driver of value, but it is now more critical than ever due to the need to invest in technology and digital capabilities to meet emerging consumer trends and demands. regulations.

The need to build financial strength through consolidation prompted the acquisition of Banque Populaire du Rwanda (BPR) by KCB Group #ticker:KCB. We have since combined the operations of KCB Bank Rwanda and Banque Populaire du Rwanda (BPR) to establish the second largest bank in Rwanda.

We are now better positioned to play a critical role in supporting the economy by focusing on inclusive growth, regional trade, economic opportunity, money management, investment initiatives, improving standard of living and poverty reduction.

Around the world, the banking market landscape has changed rapidly over the past two years. From the inclination for gradual change and careful experimentation to a faster digital metabolism.

Today, banks are shifting their prioritization from a historical regulatory response strategy to a more proactive strategic growth plan focused on improving efficiency, meeting emerging customer needs and responding to changing market dynamics.

Globally, S&P Global Market Intelligence reports that M&A activity will continue at an all-time high this year in banking and beyond.

According to the report, more than $2.5 trillion in deals have been announced and the combined value of M&A activity in US bank mergers reached more than $61 billion by the end of November.

The consolidation of the banking sector has become an economic necessity in the 21st century. Globally, small and medium banks face chronic asset quality issues that limit the availability of their capital, casting doubt on their scalability and the sustainability of their businesses.

On the other hand, large financial institutions have proven better suited to isolate asset quality strains that would otherwise drive small and medium-sized banks into liquidation, causing major disruptions within the local financial sector.

Through consolidation, the operational resilience of a banking sector is enhanced as lenders benefit from economies of scale.

As a result, regional banking sector revenue stability is enhanced through the ability of large banks to establish a more comprehensive geographic presence, with greater investment in product diversification and process efficiency.

The consolidation of the Nigerian banking sector in 2005 resulted in the emergence of 25 banks out of the original 89 that existed prior to the exercise.

Fewer and stronger banks demonstrated the sector’s potential to drive Nigeria’s economic growth agenda through credit operations, as large institutions were able to sustain significant increases in loans and advances to economic agents.

In India, challenges with corporate governance and the ability to raise adequate capital led to a 2019 ministerial decision to merge 10 smaller public sector banks into 4 with the aim of creating less global scale lenders. many and stronger.

On the African continent, the key driver of banking consolidation in the 2020s has been the prevailing economic recession and slow recovery emanating from the Covid pandemic and the ongoing war in Ukraine.

The precarious state of the financial sector across Africa has prompted financial lenders and regulators to increasingly consider consolidation to improve the operational resilience of the financial sector.

In addition, a densely populated banking environment increases the pressure on regulators to ensure compliance, which often results in fraudulent practices by small and medium banks, as regulators focus their compliance efforts on large banks in the market.

Consolidation reduces the compliance burden on regulators, ensuring a healthier and more stable banking environment.

The creation of the African Continental Free Trade Area has provided the optimal context for banks to support customers and businesses across the continent.

Consolidation in the East Africa region has positioned KCB to offer easier access to premium financial service offerings, dedicated relationship managers and capacity building support to enable MSMEs to realize their true potential.

We are better positioned to deliver world-class services to regional markets through strategic consolidation, resulting in improved efficiency, better service delivery, product diversification and lower costs for our clients in Africa from the east.

Oigara is CEO and Managing Director of KCB Group

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