Kenyan banks facing mid-life crisis

The red signals are all blaring that the banking industry might be facing its biggest crisis since the 1980’s collapses - and, many analysts say, it is largely self-inflicted.

As profits rose over the last decade, so did costs as bullish bank managers brought more workers on board, staffing middle level offices with people who would later suck more cash in hefty salaries and outsize allowances than the banks would make.

Granted, banks have been so brave and clever at maths, maintaining very healthy balance sheets even in the face of recession and ballooning payrolls.

But the bull run is painfully halting and bankers are now rethinking their strategies to grow revenues in a competitive market and stem rising costs.

Employees have become the first easy targets of the restructuring with the bigger boys leading with the axe. Heavy expenditure on technology has also not spared human jobs.

Queues in banking halls are thinning out these days, closing more teller windows and opening exit doors for workers, as technology takes over key functions.

Set itself a target

Kenya Commercial Bank has set itself a target of cutting its operating costs by a 5th over the next two years. This, the bank says, will inevitably see jobs evaporate.

“We will be keen to cut the bank’s operating expenses by about 20 per cent through restructuring that could involve a review of job roles,” said Sunil Shah, a director at the bank who heads the restructuring process.

The listed bank, trading at Sh22.25 at the close of business Friday, has brought in consultancy firm McKinsey & Company to restructure its business in a process that is likely to see the merger of departments and upgrade of its IT platform.

Already, Barclays Bank of Kenya has said it will shed 200 mid-level managers from its pay roll. “The bank is reviewing its structure to better match the strategic direction of its business,” Ms Nuru Mugambi, head of communications said.

Although, it’s only these two that have admitted that a burgeoning wage bill is gnawing at revenues, analysts say more banks are facing a similar dilemma.

According to the new chief executive of the Kenya Bankers Association Mr Habil Olaka, the situation is normal in any industry’s growth path. “I would not call this a crisis of sought but rather a normal occurrence in a growth curve,” he told Smart Company.

“What the banks are doing is to achieve a desired level of efficiency in line with their operational structures.” The job cuts are attributed to the maturity of the banking industry that is today averagely 45 years. As a result, most of them are neither growing rapidly nor slowing down in progress.

This, Mr Olaka says, calls for a balance between efficient service delivery and prudential cost management. “It is a fact that when a bank is expanding it hires more personnel to meet the growing needs. However at maturity, some of the people hired may not be needed as vital operations are already streamlined,” he says.

While the assertion might be true in the dynamics of enterprise management, the current situation where banks have more staff than they can afford dates back to 2005.

Commercial banks at the time renewed competition amongst themselves, which has been linked to the rise of Equity Bank. The desire to have extensive foothold across the country led to rapid expansions in a sheer display of financial muscle and largesse among industry peers.

Central Bank of Kenya (CBK) data shows that expansion in the banking sector was highest in 2007, which recorded a 55 per cent increase, riding the economic growth wave that picked at 7.1 per cent. Banks opened a record 165 branches.

In 2008 this reduced to 147 branches and 109 in 2009, as the brick and mortar model lost appeal. Last year, however, according to the Central Bank only 41 branches were opened.

Additionally, banks have been incorporating technology to improve service delivery and cut costs, pumping hundreds of millions of shillings in to-of-the-range ATM software and enterprise resource planning.

“Some of the technologies currently in use by banks have a life span of about three to four years. This calls for constant updating of the software,” says Mr Muchemi Wambugu, a director at audit firm Deloitte.

Heavy wage bill

As this happens, banks have been shouldering heavy wage bills. During the first nine months of 2010, most banks saw their staff cost run into billions of shillings.

Equity Bank, KCB and National Bank of Kenya bore Sh3.7 billion, Sh5.7 billion and Sh1.7 billion respectively in employee payments. Globally, 2008 and 2009 presented one of the most treacherous periods to the financial sector as the global economy was plunged into a recession.

Two years down the lane, as the global scenario patches up back to double-digit bonuses, locally tension is building up. In the rural areas, where banks aggressively opened branches in their hey days, the situation has reduced drastically with the CBK report released in late 2010 estimating a 73.5 per cent fall.

Analysts attribute the slump in growth in new branches to the rapid rise of mobile phone banking and agency banking. But the slow-down in branch expansion was not initially envisaged as commercial banks chided mobile banking services. Today, the service has enabled most customers to move money within bank accounts, pay for goods and services, and send and receive cash.

CBK’s December 2010 statistics show that mobile banking services have helped to recruit over 700,000 customers and mobilised over Sh400 million in deposits. More than 8,000 banking agents had been approved by the regulator at the end of November. Banks are also using the agency banking model to help them expand their footprints instead of setting up of new branches that need staff.

Carry out agent banking

Equity Bank says it has more than 1,000 banking agents countrywide. The Central Bank has licensed four banks, including Equity, to carry out agent banking business and approved 8,809 specific reps since last year.

Players in the banking industry are warming to the idea with KCB and Co-operative Bank planning to have their agents working in the next few weeks.

And now the traditionally technology shy Kenyan banking community is warming to the cost-saving benefits of mobile money services. Unable to stop the mobile wave, banks have joined in with their own mobile banking solutions. A number are integrating mobile phone money transfer platforms such as M-Pesa, Orange Money, Airtel Money and YuCash.

Others have launched partnerships such as Family Bank’s Pesa Pap, Equity Bank’s Iko Pesa (Orange) and M-Kesho with Safaricom. Equity Bank has been at the forefront in courting mobile firms, targeting “middle of the pyramid” income earners to open savings accounts and M-Kesho accounts – a joint venture with Safaricom that allows phone users to earn interest on their mobile phone-based savings accounts.

In November last year, the bank moved shrewdly again to access Telkom Kenya’s national service network for use in the Orange mobile money transfers via agents also known as “mini-Equity Banks”.

Barclays Bank launched a mobile money product dubbed “Hello Money” launched last year. M-Kesho has more than 600,000 users, who are able to borrow micro-loans, get insurance and make mobile-bank transfers.

Dr James Mwangi, Equity Bank chief executive officer says, “We are able to link about 3,000 accounts a day, suggesting that the demand for these products is high in this market. We may leapfrog on this new innovation to skip some of the steps that Western countries went through such as debit and credit cards.”

Airtel Kenya managing director Rene Meza says: “We have become their (banks) distribution network and for them they will be the banking solution using our technology.”

When Safaricom’s money transfer service was unveiled in 2007, the banking industry was up in arms, grumbling that it was competing with them. Local financial institutions argued that M-Pesa was unregulated, unreliable and untenable in a country such as Kenya.

But CBK and the telecoms regulator, the Communications Commission of Kenya (CCK), adopted a more sober role, preferring to monitor the products’ success.

The results are obvious – with over 14 million people now linked to conduct financial transactions using their mobile phones Kenya appears to be the unique case where regulation follows innovation with little harm to consumers.

M-Pesa alone had transferred a cumulative amount of Sh596.83 billion by September 30, 2010, since it was launched. As at September 30, the service had about 13.5 million registered subscribers making person-to-person transfers of at least Sh1 billion a month, now it has hit Sh2.45 billion. These are the figures causing the scramble for m-banking.

Mobile phones are bringing previously marginalised rural communities into the mainstream of the economy through, among other things, enabling them to conduct business transactions such as banking through the phone.

While mobile money helps diversify the financial sector by further diluting the dominance of banks, the competition has induced banks to attempt to claw back lost ground in the deposit and revenue stakes from the lucrative poor man’s e-float held by telecoms.

“We are giving financial institutions visibility to a lot of cash in the informal sector,” says Safaricom chief executive Bob Collymore. “Their earlier opposition was a reflection of a silly thing to do as the service does not compete with banks but complements them,” Mr Collymore says.

Ideally what the mobile money transfer solutions are doing is moving the bank from the branches to the hand, says Mr Mickael Ghossein, Telkom Kenya chief executive officer.

Last week, CBK governor, Prof Njuguna Ndung’u released draft guidelines for mobile and other electronic money issuance and transfer services meant to protect consumers and provide minimum standards of operations. He asked providers to reduce the charges even as the ceiling on amounts to be transferred was move higher.