- The acquisition by Shorecap III, LP of 20 percent shareholding in Credit Bank has been approved by Central Bank of Kenya.
- Credit Bank was licensed by CBK as a non-banking financial institution in 1986 under the name Credit Kenya Limited. It converted to a fully-fledged commercial bank in 1995.
- Credit Bank specializes in provision of banking services to small corporates and Micro, Small and Medium-sized Enterprises (MSMEs). It has a market share of 0.5 percent as at March this year.
Mauritian private equity fund Shorecap III, LP has received the nod to acquire a 20 percent stake in Kenyan tier three lender, Credit Bank, in the latest mergers and acquisitions in the country.
The industry regulator, Central Bank of Kenya (CBK), announced the acquisition on Monday, with an effective date of June 15, this year.
This follows CBK’s approval on April 24, 2023, under Section 13(4) of the Banking Act. The deal also got an approval of the Cabinet Secretary for the National Treasury and Planning on April 28, 2023, pursuant to Section 9(1) of the Banking Act.
Credit Bank Ltd
Credit Bank PLC (CBP) was licensed by the CBK as a non-banking financial institution in 1986 under the name Credit Kenya Limited. It converted to a fully-fledged commercial bank in 1995. At the moment, the lender has 17 branches spread across the country.
It specializes in the provision of banking services to small corporates and Micro, Small and Medium-sized Enterprises (MSMEs) and is categorized as a small bank with a market share of 0.5 percent as at March, this year.
Shorecap is a private equity fund registered under the laws of Mauritius, with Equator Capital Partners LLC as the managers of the fund.
It is established by a Limited Partnership Agreement and its shares are owned by ShoreCap III GP Limited, African Development Bank Group, CDC Holdings Guernsey Limited, European Investment Bank, KfW Development Bank and Oesterreichische Entwicklungs bank AG (OeEB).
ShoreCap’s business model mainly investing in inclusive financial services in Asia and Africa. In a statement, CBK said the objective of the fund is to expand access to affordable and responsive financial products and services for the underserved market segments.
“CBK welcomes this transaction that will diversify and strengthen the resilience of the Kenyan banking sector,” the Kenyan banking sector regulator said.
The deal has also received a nod from the Competition Authority of Kenya (CAK), which notes the transaction qualified as a merger within the meaning of Section 2 and 41 of the Competition Act No. 12 of 2010. 5.
Control during a merger or takeover may be procured through, inter alia, acquiring over 50 percent of the issued shares; majority votes cast at a general meeting and acquisition of powers to veto key decisions.
The parties’ combined and relevant assets for the preceding year was over $7.3 million.
“The transaction, therefore, met the threshold for mandatory notification and full merger analysis as provided in the Competition (General) Rules, 2019. The merging parties’ activities do not overlap,” CAK explained.
For purposes of analyzing the transaction, the product market was determined as the markets for retail and corporate banking services, and insurance intermediaries. The relevant geographic market was determined as national, the regulator said.
CBK classifies banks into three peer groups (tiers) using a weighted composite index that takes into consideration net assets, customer deposits, capital and reserves, deposit and loan accounts.
There were 39 licensed banks in Kenya as of last year. Nine banks were tier one, eight were tier two, and twenty-two were in the tier three category. The target, Credit Bank Plc, is classified as a tier three bank.
Other tier three banks include HFC Ltd, Victoria Commercial Bank Limited, Guaranty Trust Bank, Bank of Africa Ltd, Gulf African Bank, Sidian Bank Ltd, African Banking Corporation Ltd, and Habib Bank AG Zurich.
As at December 2021, Credit Bank was ranked 9th among tier three banks category and 26th overall. This ranking was based on the composite index comprising net assets, customer deposits, capital and reserves, number of deposit accounts, and loan accounts.
Kenya’s banking sector
The banking sector recorded a strong performance in the year ended December 2022, latest CBK annual report indicates, against a backdrop of a challenging business and operating environment.
The improved performance is mainly due to the continued economic recovery from the Covid-19 pandemic.
The sector’s profit before tax increased by 22 percent to $1.74 billion in the year ended December 2022. This was an uptick from $1.43 billion in the year ended December 2021. The rise in profitability was mainly driven by a higher income (18.2 percent) compared to 16.5 percent jump in expenses.
The increase in total income was mainly attributed to other income (56.9 percent), interest on placements (24.3 percent) and interest on securities (18.6 percent).
Commercial banks’ balance sheet analysis shows the banking sector registered improved financial strength in 2022. The lenders’ total net assets increased by 9.4 percent to $47.7 billion from $43.7 billion in December 2021.
“This is attributable to increase in other assets, loans and advances, cash, and investment in government securities,” CBK says in the report.
Increased loans and advances
Other assets increased by 29.9 percent, loans and advances registered an increase of 14.7 percent. In the period, cash increased by 13.9 percent, while government securities edged up by 28.6 percent.
Net loans and advances, government securities and other assets accounted for 50.8 percent, 28.6 percent, and 9.2 percent of the total net assets, respectively and remained the main components of the banks’ balance sheet.
Customer deposits, which are the main source of funding for the banks grew by 12.3 percent from $32. 7 billion to $36.2 billion in December 2022. The growth was supported by mobilisation of deposits through agency banking and mobile phone platforms.
In 2022, the banking sector capital and reserves increased by 2.7 percent to $6.7 billion from $6.5 billion in 2021.
The increase in capital and reserves is attributable to increase in retained earnings and share premium. Retained earnings increased by $514.5 million from $3.5 billion in December 2021 to $3.9 billion in December 2022. Proposed Dividends increased by $39.2 million from $304.8 million to $342.5 million in December 2022.
Banking industry gross loans
“The increase in proposed divided had minimal impact on capital and reserves as the retained earnings and share premium increased by a higher margin of $514.5million,” CBK notes.
The largest proportion of the banking industry gross loans and advances were personal and household, trade, manufacturing and real estate sectors.
In total, these four economic sectors accounted for 72.57 percent of gross loans. Personal and household, trade and agriculture sectors accounted for the highest number of loan accounts or 98.92 percent.
Trade, manufacturing, real estate, and personal and household sectors accounted for the highest value of NPLs at 70.31 percent. CBK said this was mainly due to delayed payments from public and private sectors. Equally, slow uptake of housing units and a challenging business environment hit borrowers hard.
“CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions for the loans in the four economic sectors to mitigate risk of default,” the regulator said.
Supervisory and regulatory requirements
During the period under review, 13 commercial banks were in violation of the Banking Act and CBK Prudential Guidelines. This was an increase compared to nine commercial banks reported in 2021.
Most of the violations were in respect to breach of single obligor limit mainly due to decline in core capital in some banks that have continued to report losses, according to CBK.
Five banks were in violation single insider borrower limit of 20 percent of the core capital. CBK said two were were in violation of total insider borrower limit of 100 percent of the core capital. One commercial bank was in violation due to lending more than 25 percent of the total deposits to real estate.
Four commercial banks were in violation of Section 12 (C) of the Banking Act and CBK Prudential Guideline on Prohibited Business (CBK/PG/07) which restricts investment in land and buildings to 20 percent of core capital.
Foreign exchange exposure
Five commercial banks were in violation of Section 18 of the Banking Act and CBK Prudential Guideline on Capital Adequacy. They failed to meet the minimum statutory required ratio for total capital to total risk weighted assets of 14.5 percent.
A further five banks failed to meet the statutory ratio for core capital to total risk weighted assets of 10.5 percent. Additionally, three banks failed to meet the statutory minimum required ratio for core capital to deposit ratio of eight percent.
In the foreign exchange exposure, three commercial banks were in violation of CBK’s prudential guidelines. The regulation requires institutions to maintain foreign exchange exposure at not more than 10 percent of core capital.