INSIGHTS

Increasing Appetite for Mergers and Acquisitions in Kenya’s Financial Sector

The Banking and Microfinance Sectors in Kenya has seen an increase in investor uptake despite the country on recently recovering from the vagaries of the COVID-19 Pandemic.

Introduction

Background

The Banking and Microfinance Sectors in Kenya has seen an increase in investor uptake despite the country on recently recovering from the vagaries of the COVID-19 Pandemic and being in the grip of a global recession that has resulted in inter-alia, increased foreign exchange rates and rising inflation.

Foreign Direct Investment in the country has been on a steady rise with investors increasing their stake in the finance and banking sector. As per the Central Bank of Kenya’s annual reports from 2019, foreign institutions As well as local banking juggernauts have been on an acquisition spree of their small and medium sized Kenyan banks.

There are several reasons that continually make Kenya an investment destination of choice despite the recent challenges that have buckled the East African Country’s economy. These include the strategic investment destination that Kenya offers by virtue of being a commercial hub, possessing adequate skilled labour and being at the forefront of technological disruption.  Furthermore, the strict regulation of Kenya’s Banking sector courtesy of closely monitored prudential guidelines coupled with high interest rates both stabilize the banking sector and enhance profitability.

Kenya is a strategic investment location by virtue of being a leading commercial hub in the continent. It not only possesses access to the sea, which promotes economic growth, but also possesses a growing middle class which provides ready skilled labour important for expansion. Furthermore, the country boasts the title of a leader in technological innovations like mobile money and agency banking which have tremendously expanded the reach and potential of the industry.

The Central Bank of Kenya as similarly played a crucial role in stabilizing the financial sector through studious and bipartisan oversight over all financial entities within its ambit which has ensured their continued compliance with banking regulations and guidelines. The national regulator’s earnest efforts have resulted in a stable dependable banking sector capable of weathering economic shocks. Furthermore, the relatively high lending rates enjoyed by Kenyan lenders make acquiring an interest in the sector a lucrative preposition.

Consolidation of Banks

Critics may warn that this consolidation of bigger and medium sized banks through mergers and acquisition of smaller banks may affect fair competition in the financial sector by allowing bigger banks to increase their market shares and foment monopolies. A response to this assertion would be to view the financial sector from a holistic paradigm which would present the preposition that Different financial institutions operate in distinct niche areas with plenty of non-bank players.

Case in point are banks that deal primarily in savings and lending. There are several other players including numerous Sacco Societies, non-institutional mobile savings and loan providers, microfinance institutions, just to mention a few. In this view, each category is capable of competing for market share, which ensures that an acquisition or merger of a bank does not have a deleterious effect on the overall outlook of the savings and loaning sector.

In fact, contrary to having a negative effect on the country’s economy, these mergers and acquisitions encourage healthy competition, create employment as the entities look to increase their footprint in the region, reinforce the ability of the financial market to withstand economic shocks, and overally improve the position of the country as a reliable financial destination.

Key Insights at a Glance

Many foreign Investors in the Finance sectors have been on a Mergers and Acquisition spree since 2019
Kenya is a target for investors because of its strategic location, abundant labour and technological disruption
Consolidation of finance institution has to be done carefully to reduce chances of unfair competition

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