Challenges in the Era of Globalization - iaabd

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
organizations require borrowers to put up collateral, enabling individuals seeking to become
entrepreneurs, to attain small loans to start their businesses.
Overview of the Kenyan Banking Sector
The financial sector is reputed to be the engine of growth in any economy; hence a growing financial
sector is not only indicative of a thriving economy but also an impetus to its growth (Oloo 2008). The
Kenyan financial sector has evolved over the years. The post-independence period in Kenya was one of
tremendous economic growth. The banking sector grew substantially as the government made conscious
efforts to transfer economic activity into the hands of indigenous Kenyans.
Twenty years after independence in 1983, the stage was set for Kenya’s first post-independence banking
crisis when several indigenous banks developed acute liquidity problems. In spite of Treasury and
Central Bank of Kenya’s efforts to bail out the ailing institutions, one institution was closed in December
1984 (Central Bank of Kenya 2008). The Deposit Protection Fund Board was established in 1985 as a
deposit insurance scheme to provide cover for small depositors and act as liquidator to banks which
could not be salvaged. Two more institutions collapsed in August 1986 followed by a third in January
1987. The next crisis came in 1989 when seven institutions were found to be incurably ill and drastic
corrective action was taken. A consolidation scheme was crafted by the government where by
Consolidated Bank of Kenya was formed to take over the assets and liabilities of the seven collapsed
institutions. The scheme was supervised by the Treasury which also funded the seed capital for the new
bank through the Deposit Protection Fund Board (Central Bank of Kenya 2008, www.centralbank.go.ke).
In 1993 fourteen financial institutions were placed under liquidation. The early 1990s were characterized
by intensive political activity and an unfortunate by-product of this activity was a mushrooming of
“politically correct” banks licensed for political exigencies (Central Bank of Kenya, 2008). This resulted
in a general downturn in Kenya’s banking sector. The sector was liberalized in 1995 and exchange
controls lifted.
The Kenyan financial services sector currently has 150 institutions namely 45 commercial banks, 2
mortgage finance companies and 105 foreign exchange bureaus. In the second half of 2007, the
remaining building society, Family Finance, converted into a commercial bank: Family Bank. The
banking sector is highly concentrated with eight out of forty five banks controlling 70% of the sector by
all conceivable aspects (Mataen, 2008). Kenya’s banking system remained stable through April 2008
despite the global economic crisis, and its overall performance was an improvement from satisfactory
rating attained during a similar period in 2007. The banking sector total assets stood at KShs 978 billion
by December 2007, while total liabilities were KShs 845 billion. Sector profitability has continued to
improve over the past five years. Sector profitability grew 19% between 2006 and 2007 to stand at KShs
42 billion (Mataen, 2008).
Equity Bank
Equity Bank Limited (Equity) is said to have revolutionized the banking concept, demystifying access to
banking of the ‘unbanked’ in Kenya, who in the past could not afford to open accounts because of the
inaccessibility of the multinational banks in rural areas (Euro money, 2008). Equity was founded as
Equity Building Society (EBS) in October 1984 and originally focused on savings and provided mortgage
financing. Between 1984 and 1993, Equity experienced a stagnant deposit base, stagnant loan base, a
deteriorating loan portfolio and continuing losses. On 31 st December 1993, Equity received a Central
Bank of Kenya rating as technically insolvent. The rating noted that supervision by the Board was poor,
management supervision inadequate, asset quality unsatisfactory, the bank’s capital fully eroded by
accumulated losses, and deposits were used to meet operating expenses (Coetee, Kahhucho, & Mnjama,
2002).
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