Kenyan banking sector study – Phase I Legally Privileged and Confidential 7 October 2014 Legally Privileged and Confidential Document Reference: Final Date: 7 October 2014 Contact Information Genesis Economic Consulting (Pvt) Ltd Office 702 7th Floor International Trade Tower Nehru Place New Delhi – 110019 Tel: +91 11 4955 3300 www.genesis-analytics.com Authors Genesis Analytics Contact Person Geeta Singh [email protected] ii Legally Privileged and Confidential Table of Contents EXECUTIVE SUMMARY ............................................................................... 1 1. INTRODUCTION ..................................................................................... 9 2. OVERVIEW OF THE KENYAN BANKING INDUSTRY ........................ 11 2.1. Growth in the industry ........................................................................... 12 2.2. Regulatory environment ........................................................................ 13 3. APPROACH FOLLOWED FOR THE MARKET INQUIRY .................... 16 4. MARKET SEGMENTS AND PRODUCTS ............................................. 18 4.1. Market segments .................................................................................. 18 4.2. Products ............................................................................................... 19 5. ANALYSIS OF MARKET STRUCTURE ............................................... 24 5.1. Market Concentration ........................................................................... 24 5.1.1. Concentration in different market segments and products ...................... 29 5.1.2. Concentration in counties in Kenya .......................................................... 47 5.1.3. Conclusion ................................................................................................ 50 5.2. Barriers to entry and expansion ............................................................ 50 5.2.1. Entry barriers from regulatory requirements ............................................ 50 5.2.2. Other barriers to entry and expansion...................................................... 52 5.3. Buyer power ......................................................................................... 55 5.4. Conclusions on Market structure ........................................................... 55 6. INTEREST SPREAD ANALYSIS .......................................................... 59 6.1. International comparison ....................................................................... 59 6.2. Interest spread analysis for Kenyan banks............................................ 60 6.2.1. Analysis of lending and deposit rates ....................................................... 63 6.3. Lending and deposit spreads and concentration ................................... 67 7. PROFITABILITY ANALYSIS ................................................................. 70 7.1. Financial ratio analysis for Kenyan banks ............................................. 70 7.2. International comparison ....................................................................... 75 iii Legally Privileged and Confidential 8. CONCLUSIONS AND PHASE 2 TASKS .............................................. 77 9. POLICY RECOMMENDATIONS ........................................................... 81 APPENDICES .............................................................................................. 83 Appendix A: Regulatory Environment and Changes ....................................... 83 Appendix B: Lending and deposit by bank as of December 2013 ................... 91 Appendix C: Lending and deposit by bank as of December 2012 ................ 101 Appendix D: Risk spread by bank as of December 2013 .............................. 109 Appendix E: Risk spread by bank as of December 2012 .............................. 118 Appendix F: Profitability by bank for 2013 .................................................... 128 Appendix G: Profitability by bank for 2012 .................................................... 129 Appendix H: Calculation of cost of equity ..................................................... 131 List of Figures Figure 1: Total loans and deposits in Kenyan banking industry from 2010-2013 (in Ksh Million) ..................................................................................................................................... 12 Figure 2: Share of corporate, SME and personal segments in the Kenyan banking industry 19 Figure 3: Share of overdrafts and term loans in the Kenya banking industry ........................ 22 Figure 4: Share of overdrafts and term loans in the Kenya banking industry ........................ 22 Figure 5: Market share in total lending and deposits .............................................................. 27 Figure 6: Market share of MFBs based on total loans issued by them .................................. 28 Figure 7: Market share in corporate lending ........................................................................... 31 Figure 8: Market share in corporate deposits ......................................................................... 31 Figure 9: Market share in corporate overdraft lending ........................................................... 32 Figure 10: Market share in corporate term loans.................................................................... 33 Figure 11: Market share in corporate demand deposits ......................................................... 33 Figure 12: Market share in corporate saving deposits ........................................................... 34 Figure 13: Market share in corporate term deposits ............................................................... 35 Figure 14: Market share in SME lending ................................................................................ 36 Figure 15: Market share in SME deposits .............................................................................. 36 Figure 16: Market share in SME overdraft lending ................................................................. 37 Figure 17: Market share in SME term loans ........................................................................... 37 Figure 18: Market share in SME demand deposits ................................................................ 38 Figure 19: Market share in SME saving deposit ..................................................................... 39 Figure 20: Market share in SME term deposits ...................................................................... 40 Figure 21: Market share in personal lending .......................................................................... 40 Figure 22: Market share in personal deposits ........................................................................ 41 Figure 23: Market share in personal overdrafts ...................................................................... 41 Figure 24: Market share in personal term loans ..................................................................... 42 Figure 25: Market share in personal demand deposits .......................................................... 43 Figure 26: Market share in personal saving deposits ............................................................. 43 Figure 27: Market share in personal term deposits ................................................................ 44 Figure 28: Market share in mortgage loans ............................................................................ 45 Figure 29: Market share in consumer durable loans .............................................................. 46 Figure 30: Market share in credit cards amount utilised ......................................................... 46 Figure 31: Lending HHI by county .......................................................................................... 47 Figure 32: Deposit HHI by county ........................................................................................... 48 iv Legally Privileged and Confidential Figure 33: Yield curve for the Kenyan banking industry in December 2013 .......................... 64 Figure 34: Excess returns for 117 countries ........................................................................... 76 List of Tables Table 1: Total assets, loans and deposits in Kenyan banking industry (in Ksh Million) ......... 11 Table 2: Products offered by banks to various market segments and their description ......... 20 Table 3: Banks that gave consent .......................................................................................... 25 Table 4: Banks for which total deposits and loans were obtained from publically available sources ................................................................................................................................... 26 Table 5: Comparison of loans by MFBs and by the commercial banks ................................. 28 Table 6: Geographic reach of Kenyan banks in terms of branches and sub-branches, agencies and ATMs ................................................................................................................ 48 Table 7: International comparison of regulatory requirements to run/start-up a bank ........... 51 Table 8: Concentration summary for market segments ......................................................... 56 Table 9: Concentration summary for products within market segments ................................ 57 Table 10: Summary of concentration results for specific lending products