Fewer commercial banks are best for this country

One of the more significant policy decisions announced by Finance minister Amos Kimunya during his budget speech was the plan to force commercial banks to increase minimum capital from the current Sh250 million to Sh1 billion.

I fully support the minister. If anybody wants to collect deposits from the public, he must be ready to put enough of his own money into the business.

I say so because when you trace the history of bank failures in Kenya, you will realise that most of those that collapsed were poorly capitalised entities that owed their existence to influential patrons within Government.

Because minimum capitalisation requirements were low, all one needed to do was to raise a couple of million shillings from a few of his cronies and then use his powerful connections to acquire a banking licence.

Having received a licence, the next thing was to use the same political connections to force parastatals to deposit any surplus cash they held in these poorly-capitalised institutions.

In a matter of months, the cowboys would be sitting on billions, having raised large deposits from parastatals such as the National Social Security Fund, the National Hospital Insurance Fund, or the Kenya Ports Authority.

Through aggressive advertising, they would cajole innocent members of the public into depositing their hard-earned savings into these bottomless pits by invoking the policy of Africanisation.

With so much money at their disposal, the owners and directors of these institutions hurriedly incorporated companies that served as conduits for accessing these public deposits and spending it on ostentation: expensive-looking corporate headquarters, limousines for directors, and in purchasing coffee estates.

The tide was to turn when the cowboys lost political protection. Like dominoes, their banks collapsed one after another, leaving in their wake huge stacks of insider loans, poorly appraised credit facilities extended to relatives, cronies and politicians, and insolvent parastatals.

How did the Government respond? By tightening banking regulations.

Higher capitalisation requirements were introduced. High capital to deposits ratios to limit the amount of deposits a commercial bank can collect to the capital put in by shareholders were introduced.

New limitations were introduced on lending to insiders and relatives. The supervision department of the Central Bank of Kenya was expanded.

Enough of history. Without a doubt, gradual tightening of banking regulation has achieved a great deal. By African standards, we have a large and relatively diversified banking sector. However, this sector has still routinely failed to provide adequate services to Kenyans.

Too many institutions which pass for banks do not deserve to be called so. Instead of mobilising savings and lending money, they turn into mere traders – trading in foreign exchange, in Government Treasury bills, and in servicing import-export businesses.

An influential cowboy can still use connections to get a banking licence, employ political patronage to get billions of shillings in deposits from parastatals and the Government, and use the money to make huge profits from lending that same money to the Government in the form of Treasury bills and bonds.

If, as the owner of a commercial bank, you discover you can make profits so easily, why bother with small depositors or the ordinary businessman looking for money to expand his small business?

What this country needs are a few, strong, well-capitalised banks that are prepared to do more than extend overdrafts facilities to existing businesses. We want large well-capitalised banks where an ordinary citizen can deposit money and rest assured that his hard-earned savings are safe.

All over the world, the trend in the banking sector is mergers and acquisitions. Size has become extremely critical especially for a country like ours which must reposition its commercial banks to become competitive players within the East and Central African region.

In 2006, there was a hue and cry when the governor of the Central Bank of Nigeria, Prof Charles Soludo, increased the minimum capital requirement for commercial banks from $10m-$250m.

As it turned out, the decision precipitated a wave of mergers which have seen the number of commercial banks fall from 89 to 20. Size is what will make commercial banks active players and not mere spectators in the emerging world economy.

When you have too many small banks, each of them with expensive headquarters, separate investment in software and hardware, and heavy fixed costs, you increase intermediation costs and put pressure on the banks to maintain large spreads between deposits and lending rates.

Mr Kimunya’s critics are right when they say that the Sh1 billion minimum capitalisation requirement will kill small “African-owned” commercial banks.

Fortunately, the small players have an alternative. With the coming into effect of the new Micro-Finance Act, one can now do lending business without having to own a bank.

The minimum capitalisation requirement has been set at between Sh20 million and Sh60 million. We need fewer banks. Period.

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Fewer commercial banks are best for this country