By October 26, 2019

Why Mergers in the Kenyan Banking Sector Are Good for the Economy

By October 26, 2019

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The Competition Authority of Kenya has given the green light to yet another bank acquisition in Kenya. The Authority approved the acquisition of 93.57 per cent of Transnational Bank by Access Bank PLC, a Nigeria-based financial institution.

This comes hot on the heels of the listing of new shares by NCBA, the new product of NIC Bank PLC and Commercial Bank of Africa merger. The listing has underlined the benefits of mergers in the financial sector.

Although few in between in the past two years, the Central Bank of Kenya, Governor Patrick Njoroge said the country will witness more mergers and acquisitions in the sector.

In the last Financial Sector Stability report, the Central Bank intimated that mergers bore more fruit in terms of profit for the merged entity.

“Despite the decline in profitability in 2014 – 2018, banks that merged are more profitable than those that consolidated through acquisition,” the report said.

It added that “While mergers impact organizational culture and business models, leading to more efficiency and profitability, acquisition may not necessarily be motivated by integration of business model and organizational values. The new entity after acquisition may experience organizational frictions, thus undermining profitability.”

Acquisitions were also motivated by achieving efficiencies that Tier 3 banks or microfinance institutions had, the report noted.

Whereas merges and acquisitions are strategies bank managers adopt to increase profitability, the regulatory perspective is that it enhances stability of the resultant entity and the entire banking sector.

“The benefits of banks consolidating include; improved resilience to shocks given higher capital buffers lower supervisory and compliant costs. The stability benefits of consolidation in the banking sector have informed mergers and acquisition, especially after the liberalisation of the financial sector since 1990-2018,” the CBK stated.

Kenya had twenty-eight (28) mergers in 1990’s, ten (10) in 2000’s and three (3) in 2010’s. In addition, there were two (2) acquisitions in 2000’s and six (6) completed 2010-2018.

Already in 2019, KCB’s takeover of National Bank of Kenya, NIC and CBA mergers and latest Transnational Bank takeover by Access Bank PLC shows a continuing trend that is not about to halt.

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