Bank of India has made applications to regulators to be allowed to incorporate as an independent Kenyan bank to pave way for a buyout of a local rival as it races to increase its footprint in the region.

The deal will also enable it tap into the growing number of Indian companies with investments in the country.

The Kenyan unit of Bank of India has four branches in Nairobi, which runs as a branch of the Mumbai-based bank rather than as subsidiary.

The bank keen on a country-wide presence has opened talks with an unnamed bank for a potential tie-up, opting for acquisitions rather than organic growth in its quest to hit the target.

But its incorporation in India is posing regulatory challenges in its pursuit of buyout deals.

The bank has applied to the Central Bank of India and is set to put another application to Central Bank of Kenya (CBK) to be allowed to run as a fully fledged Kenyan bank and subsidiary of its parent company based in India.

This is aimed at reducing regulatory requirements and reducing its tax obligations by avoiding double taxation (in India and Kenya), lawyers say, arguing that a branch cannot acquire another branch.

At present, the bank will have to seek regulatory approvals in India and Kenya and finance the transaction from the balance sheet of its parent company.

"Some small Kenyan banks are in touch with us to explore prospects for acquisition, but first we want to incorporate in Kenya," Mr Som Sekhar, a senior executive at the bank told Business Daily in an interview on Monday.

"We are looking at expanding to Nakuru, Kisumu and Mombasa, mainly through the inorganic route," added Mr Sekhar.

New opportunities

The bank's expansion drive is informed by the growing number of business run by the ethnic Indian community in manufacturing and trade and Kenya's high interest margin.

The margin between cost of deposits and yield on advances stands at between three and four per cent in India, about a third of the 10 per cent to 11 per cent range that obtains in Kenya.

"The increase in Indian investments has thrown up new opportunities for banks, which we would like to tap by expanding our presence in the region, mainly through the acquisitions," a senior executive of the bank told India's press in Mumbai in May.

The bank declined to name the banks it is targeting, but said the marked bank have the same profile as Bank of India, a clear sign that its keen to buy out a bank with a heavy presence of Indian companies.

Some of Indian corporate jewels with offices in Kenya include third mobile operator Essar Kenya, truck firm Tata, oil dealers Reliance and telecommunications firm Zain Kenya, which is majority owned by India's Bharti Airtel.

The bank is also eyeing transaction income from the growing import business given that India is the second largest importer of goods and services after United Arab Emirate with imports worth Sh83.2 billion.

Talk of tie ups in the banking scene has hit fever pitch after the Government asked banks to increase their minimum core capital to Sh1 billion by 2012 from the current Sh500 million.

The increase in capital was informed by the need to position smaller banks to compete and break the dominance of the top five players who among them control 75 per cent of the market that has 44 players.

For Bank of India, an acquisition would provide an easy solution from growing from within itself, which could involve buying land, putting up buildings, hiring local staff, struggling to lure deposits and fighting for market share against established rivals like Barclays Bank, KCB and Standard Chartered Bank.

It has 3, 200 branches in India and operations in US, Europe and Asia

If the acquisition comes to pass, this would be its second overseas acquisition.

In 2008, the bank acquired a 76 per cent stake in PT Bank Swadesi Tbk, Indonesia.

Bank of India has a presence in other African countries including South Africa, Tanzania and Zambia. In Kenya, the bank is not only keen to grow it's lending, but also transaction income in the form of cash transfers, issuing letters of credit and guarantee of letters of credit.

In 2009, the bank lent Sh5.4 billion out of the Sh13 billion it holds in customer deposits, with the rest of the cash being placed in government paper.

It returned a profit of Sh609 million in 2009 compared to Sh570 million a year earlier.