In 2024, around 90 percent of the banking industry’s profitability was recorded by nine big banks labelling a sign of growing market concentration that intimidates competition and consumer choice.
Report by the Central Bank of Kenya (CBK) on the 2024 bank supervision indicates the gross profit of the sector went up to KES.260 billion last year, which was an uprise from the gross profit of KES.219.2 billion in 2023. With that surge, the eminent lenders gained a huge 89.3 percent of the earnings in the review period.
Meanwhile, the share of the medium sized banks plunged to 10.2 percent from 13.6 percent in 2023, whereas, small lenders’ share dropped to 0.5 percent from 1.7 percent. This data reveals a progressing shift in the Kenya’s banking terrain, signalling a widening gap between big lenders and the rest.
Big Banks Benefit from Economies of Scale
Banks like KCB, Equity, NCBA, Standard Chartered and Co-operative bank have benefitted from economies of scale. This permits them to sustain proportional cost base compared to their revenue which they obtain from lending and transactions with millions of customers, government entities and private firms.
These big lenders have also dominated the government securities market and often serve as lead arrangers in syndicated loans, including public private partnerships. Their sheer balance sheet size has given solace to depositors, especially after the collapse of Chase Bank and Imperial Bank almost a decade ago. Such occurrences have swept away confidence in smaller lenders, triggering a shift of deposits to the larger banks, which appears to be too big to fail. This shift in depositor confidence continues to weigh heavily on small lenders.
Challenges of Small Banks
On the flip side, most of the small banks seem to be facing some existential crisis. Majority of them are struggling to meet basic regulatory thresholds including, minimum capital requirement of KES. 1 billion, capital adequacy ratio of 14.5 percent and liquidity ratio of 20 percent. Chances of this situation to worsen are high after the government raised the minimum absolute core capital for local banks over the next five years to KES.10 billion.
These constraints have stifled the ability of small banks to grow their loan books or compete effectively for deposits, locking them into a vicious cycle of low earnings and regulatory non-compliance. Their limited branch networks and unintegrated digital infrastructure, have made them less attractive to fast growing retail and SME segments.
Now, it remains upon the smaller lenders to realize innovative ways to scale up either via niche specialization, mergers or through partnerships, otherwise the Kenyan banking sector risks becoming a playground for powerful few.
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