Business Daily (Nairobi)
David Mataen
13 May 2008
opinion
Innovation has become the economic religion of the 21st century. With today's markets changing at warp-speed, no existing business believes it has a future without a strong focus on innovation.
Companies with bold leadership are attempting to create an open, tolerant culture in which innovation can flourish.
Nowhere is the need for urgent innovation leading to industry consolidation so urgently than in the Kenyan banking industry. The Ministry of Finance has tried to force consolidation severally by slapping higher capitalisation requirements, to no avail and against strong special interests headwinds.
Everywhere you turn you see glaring evidence of the urgent need for bank consolidation. But what do the banks do, they dig in the feet, bury their heads in the sand and pray that this nasty consolidation ill-wind could just blow away.
Just what is the size and shape of this market drive for consolidation? Let us look at three salient features.
First, interest margins on a free-fall. Average liquidity in the market stands at about 38-42 per cent, and banks are adding on new customer deposits at a rate of 18 per cent a year.
Most corporates today are accessing overdrafts at or below ruling treasury bill rates, when the central bank auctions a bond it invariably gets three to five times more than it is looking for, banks treasury departments are actively finding ways to commit these excess monies, ranging from trading treasuries to hawking loans and credit cards.
The banks' traditional business of taking deposits, parceling it to interest paying borrowers and holding loans to maturity is being shaken to the core.
It is even compounded by the introduction of in duplum which caps the maximum interest chargeable at 100 per cent of loan amount. Soon banks will make money only from loan origination fees. The definite future of lending is in trading loan assets through securitisation.
In order to do this, scale is imperative as large amounts of loan assets need to be bundled together and sold to institutional investors to have a meaningful all year round supply. Result? Consolidation.
Second, game changing strategies. Banks tradition of making super-normal profits has been well and truly widely observed. M-Pesa means anything to you? It is the quintessential illustration of where new competition is coming from. Many more game changing strategies are being dreamt up outside of the realms of banking that tear right into the hearts of banks, leaving some asphyxiated, or die out of loss of breath.
To effectively counter these incursions from without, banks need to have the scale, networks and financial flexibility to stand up to unremitting competitive upheavals. Again, consolidation.
Third, a revolution in customer experience. Let us be frank.Few banks especially mass market players currently give and constantly can assure customers of a delightful experience.
On the other hand customers are getting more sophisticated and demanding. Funky gadget manufacturers tell them that they should have and should demand more virtual electronically delivered service 24/7.
In order to cope banks have to constantly modernise, upgrade or overhaul IT systems, enhance delivery channels, expand networks and scale up platforms or replacement them al together.
The operative word is constantly. Few banks can achieve this on current customer numbers or transaction volumes. Kenswitch ATM system is a demonstration of this in a small way.
Full consolidation is the ultimate eventuality. Banks therefore ought to stop delaying the inevitable. It takes a radical innovator to provide leadership, who wants to be counted first?
Mr Mataen is Corporate Finance director, Faida Investment Bank
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