Why Nigerian banks find Kenya attractive

Kenya's robust technology and open banking ecosystem is attracting more Nigerian banks into the country, with the latest being Access Bank Kenya, even during the Covid-19 pandemic.

''Silicon Savannah'' has the highest adoption rate of open banking in Africa, having being ranked second in the world after China in terms of mobile money payments by American research firm Boston Consulting Group BCG last September.

According to 2019 Moody's survey, banks in Kenya are more efficient, incur less costs and have every reason to outperform their Nigerian counterparts, despite the latter's Gross Domestic Product being three times that of the former.

The report also revealed that banks in Kenya have an average cost-to-income ratio of 49 per cent over the last four years, compared with 57 per cent for Nigerian banks.

After launching in Kenya last month and becoming the third Lagos-based bank in Kenya after GT Bank and United Bank of Africa (UBA), Access Bank said it would capitalise on the high uptake of Big Data analytics and artificial intelligence in Nairobi.

"We are here to use the existing technology to strengthen the resilience of Kenya's banking sector. We will put our customers at the forefront of everything we do, helping them achieve their dreams and go beyond banking to access more," said country managing director David Aluko.

More confidence in Kenya's banking sector has been bolstered by open banking, which is the system of allowing access and control of consumer banking and financial accounts through third-party applications.

 It is seen by experts as the key reason foreign banks and fintech players prefer Kenya to other countries.

"Open banking in Kenya is playing a big role in offering financial services to large sectors of the population who have not had access to financial services before," says Polys Hadjikyriacos, the chief business development officer of digital banking platform NETInfo. 

"It is driving transformation in digital financial services by permitting consumers to own and share their data and enabling banks and fintech companies to utilise this data to offer enhanced products and services to the market."

Low risk appetite

Though African banks are well positioned to embrace the opportunities created by the innovation, the Nigerian banking landscape is a big-ticket market.

"Low risk appetite for retail lending has pushed Nigerian banks to focus on what they consider reliable borrowers, which are often large private conglomerates or entities in which the State holds interests," says George Bodo, director at Callstreet Research and Analytics.

Kenyan banks, he notes, borrow dollars at rates of around seven per cent per annum, but the cost of dollar funding in Lagos is quite elevated, at more than 10 per cent.

Sila Obegi, the chief executive of Nairobi-based Meta Capital, says open banking has helped a great deal to build a close working relationship between fintech startups and banks in Kenya. 

"There are so many things you can do today through open banking, which was not possible five years ago. Most banks and telcos nowadays freely avail their application programming interface (API) documentation which makes it possible for fintechs to build solutions that interact with a wide range of account transaction information," he told the Business Daily.

Coming to Kenya will also offer lenders from Lagos a reprieve from the policies that are far more onerous than what their counterparts in Nairobi have to contend with, according to Adesoji Solanke, director for frontier and sub-Saharan African banks equity research at Renaissance Capital.

"Nigerian banks are faced with a very punitive regulatory environment at home, so their thinking is to potentially scale-up their operations out of Nigeria so that those can contribute significantly more to their group revenue and profit," he said in an interview with Bloomberg.

Nigerian banks need to hold 27.5 per cent of their cash as reserves, six times that of their Kenyan counterparts, while at the same time having to extend 65 per cent of their deposits as loans.

Kenya, like Ghana, has too many banks relative to size of the population, meaning more consolidation is inevitable following at least five takeovers over the past year.

"You would likely continue to see international banks trying to find ways to either get into the market by buying one of the banks in the country, or where they do have operations currently in the country, trying to scale up their existing businesses," Mr Solanke said.