Ongoing branch network expansion will determine the winner of the war for dominance in Kenya's banking sector, a new industry report indicates.

The report published by ThinkBusiness, a financial consultancy and publishing firm, says interest rates-based competition is being steadily relegated to the back banner by the quest for a wider reach and bigger customer base.

This growth in branch network is expected to enable banks recruit thousands of new customers from whom they hope to grow their incomes by charging fees and commissions.

Besides, banks are also keen to increase their interest income through increased advancement of loans to as many clients as possible.

Non-interest income - money that is not generated by interest charged on loans and advances - grew by 20 per cent in the third quarter of this year compared to the same quarter last year. Interest income on the other hand grew by 18 per cent over the same period.

The report reckons that interest income remains a challenge to most banks because only a small fraction of Kenyans in salaried employment or with stable businesses have access to it.

ThinkBusiness says rapid growth in bank assets is the main driver of the expansion strategy.

Mr Ochieng Oloo, the managing director of ThinkBusiness, reckons that this year is likely to be the best for the Kenyan banks in terms of assets and profits growth. Future performance will depend on continued economic expansion.

"I do not think we have reached the peak yet. There is a lot of room for growth in the banking sector as long as the economy continues to grow," said Mr Oloo.

So far quarterly results show that banks have performed better than they did over a similar period last year.

Profit before tax for instance has grown by 25 per cent and the prevailing period is expected to be even better for the banks because of the high consumption rate associated with the festive period.

In the third quarter, bigger banks grew their profits by 30 per cent while their asset base grew by 20 per cent.

The exception was at Diamond Trust Bank (DTB) whose asset base grew by 70 per cent in the past one year.

For most banks, customer deposits also grew by 50 per cent, giving banks more money to do business. "The total growth in the banking sector is likely to hit 30 per cent by the end of the year," said Mr Oloo.

The report also shows a significant improvement in the in the non-performing loans in the banks' books with the industry average dropping to 50 per cent.

Save for City Finance, all banks are expected to make profits this year. City Finance is a candidate for takeover where a new management is expected not only to inject capital but reposition the bank in the market.

ThinkBusiness has subsequently announced the Banking Awards for 2007, which will be held on December 5 in Nairobi. The awards will be won on a combination of merits including financial soundness, opinion polls, market research and professional assessments.

The overall winner on the category on 'The Best Bank in Kenya' will be the bank with an all round appeal.

Judges for the awards are: Richard Ketley, of South Africa's Genesis Analytics which specializes in banking strategy; Chris Mwebesa, the chief executive of Nairobi Stock Exchange; Dr Havi Murungi, associate research director of Consumer Insight and Richard Mukoma, chief executive officer of Interbrand East Africa.