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Johnson, S & Upadhyaya, R 2015, Transformation of Kenya’s Banking Sector 2000 - 2012. in A Heyer & M King
(eds), Kenya's Financial Transformation in the 21st Century. Financial Sector Deepening Kenya, Nairobi, pp. 17.

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 Kenya’s Financial
Transformation
in the 21st Century

Edited by Amrik Heyer and Michael King

 Kenya’s Financial
Transformation in the
21st Century
EDITED BY AMRIK HEYER AND MICHAEL KING
FSD Kenya
5th floor, KMA Centre
Corner Chyulu/Mara Road
Upper Hill
P.O. Box 11353-00100
Nairobi
Kenya

Tel: +254 20 292 3000

Email: info@fsdkenya.org
Web: www.fsdkenya.org

ISBN: 978-9966-093-91-2

Cover photograph by Gitau Mburu.

© FSD Kenya, 2015

 CHAPTER 1

Transformation of Kenya’s
Banking Sector, 2000–2012
RADHA UPADHYAYA AND SUSAN JOHNSON
 Transformation of Kenya’s Banking Sector, 2000–2012 17

1 Introduction and motivation

The finance for growth literature emphasises the long-run positive relationship
between finance and economic growth (Levine, 1997; Demirgüç-Kunt and
Levine, 2001). However there is now an acceptance that this relationship
has important ‘non-linear effects’ (Beck, 2013) and that ‘we cannot carry on
assuming that more finance is better’ (Griffith-Jones, 2013). Furthermore, it
has now been recognised that it is not only foreign banks, but also local banks,
that are important drivers of credit growth, access to finance for the poor
and innovation (Lin, 2009). It is within the context of these debates that this
chapter discusses the evolution of the banking sector in Kenya.
The changes in the Kenyan banking sector since colonial times
largely mirror the country’s political and economic transformation
from a colony into an independent nation. The pre-independence
period was characterised by a small banking sector with foreign-
owned banks that predominantly extracted profits out of the colony.
The post-independence era from 1963 to 2000 had three phases that reflect
the growing pains of a newly independent nation. The first phase (‘Harambee’),
from 1963 to 1980, saw the creation of government-owned banks. The next
phase (‘Nyayo’) was characterised by a large increase in banks and non-banking
financial institutions (NBFIs) including the creation of local banks, several
of which had strong political connections.1 The next phase (‘Liberalisation’),
from 1990 to 1999, saw an explosion in the growth of banks but was also
characterised by instability, with a large number of bank failures. Therefore,
while liberalisation had some positive effects including an increase in the levels
of deposits, the overall results of liberalisation were largely disappointing both
in terms of the depth and the stability of the financial sector. Furthermore,
financial access was not a major consideration for commercial banks or the
Central Bank of Kenya.
The next phase (‘Transformation’), from 2000 to 2012, is the focus of this
chapter. One of the impetuses for this phase was changes in the regulatory
environment in 2000. Among these key changes were an increase in minimum
capital requirements, the reinforcement of single borrower limits and restricted
lending to insiders.

Authors’ note: The authors would like to thank Mr. Ochieng Oloo of Think Business Ltd and Mr. Ashif Kassam of RSM
Ashvir Ltd for sharing their datasets on the financial statements of banks in Kenya. The authors would also like to thank
participants at the Kenyan Financial Transformation (2006–2014) workshop at FSD Kenya, Nairobi on 13–14 June
2014, and an anonymous referee for useful comments. The views expressed here remain the authors’ own.
1 Harambee and Nyayo were the terms used by the first and second presidents of Kenya, President Jomo Kenyatta and
President Daniel Arap Moi, to capture the philosophy of their leadership.
18 Kenya’s Financial Transformation in the 21st Century

The chapter shows that the banking sector in Kenya transformed significantly
during this period, with increased depth, stability and access. The chapter also
shows that the composition of the banking sector changed significantly during
this period. The transformation has been led by local large privately owned
banks that have pursued expansionary strategies, including developing products
for small and medium-sized enterprises and a focus on the ‘unbanked’.
However, the chapter highlights that key challenges remain, including (i)
high interest rate spreads; (ii) a decreasing proportion of lending going to key
economic sectors including agriculture and manufacturing; and (iii) slower
transformation of local small privately owned banks.
The chapter is organised as follows. Section 2 provides a historical perspective
on the banking sector in Kenya, summarising the major changes in the banking
sector from 1896 to 2000. Section 3 analyses the changes that took place in
the banking sector as a whole in the period 2000–2012. Section 4 discusses the
changes in the industry composition and focuses on the segmented nature of
the banking sector in Kenya. It also highlights the rise of local large privately
owned banks and their contribution to increased financial access. Section 5
concludes.2

2 History of the banking sector – 1896 to 2000

2.1 Colonial origins – 1896 to 1950
The establishment of the British Empire in East Africa began with the
establishment of a trading frontier under the agency of the Imperial British
East Africa Company (IBEAC), incorporated in the United Kingdom in 1888.
IBEAC sought to inherit the centuries-old long-distance trade that linked the
African interior to the African coast, and the African coast to the Indian sub-
continent via the Indian Ocean. Colonial rule was formally established with
the declaration of the East African Protectorate in 1895 under the sovereignty
of the Sultan of Zanzibar. Construction of the Uganda Railway (later the East
African Railway) began in 1896 from the East African coast at Mombasa and
reached the point that would become the capital of modern Kenya, Nairobi,

2 The data sources for this chapter are listed in Appendix 1. For aggregate-level indicators, we have used data that
are publicly available from the World Bank website and the Central Bank of Kenya (CBK) website. Data on banks’
financial statements are also publicly available, as banks are required to publish their financial statements quarterly
in the Kenyan press. However, these bank-level data are not available in a database from the CBK website. We have
therefore relied on two companies – Think Business and RSM Ashvir – that collate the publicly available data into
a database and use the data to present annual awards for banks. The dataset was randomly checked against original
bank balance sheets to confirm its veracity.
 Transformation of Kenya’s Banking Sector, 2000–2012 19

in May 1898. In 1920, the nominal sovereignty of the Sultan of Zanzibar

was confined to a ten-mile strip along the coast, which the British then rented
from the Sultan. The country was renamed the Colony and Protectorate of
Kenya (Hazlewood, 1979; Atieno-Odhiambo, 2000).
The origins of commercial banking in Kenya lie in these commercial
connections between British East Africa and British India at the close of the
19th century. The first two British banks to be established were the National
Bank of India in 1896 and the Standard Bank of South Africa in 1910. The
former became National and Grindlays Bank and the latter became Standard
Chartered Bank. The National Bank of South Africa was established in 1916
but was later merged with Colonial Bank and Anglo-Egyptian Bank to form
Barclays Bank (Dominion, Colonial and Overseas) in 1926, which was also
based in London.
The most important point to recognise is that while commercial banking
became relatively well established in Kenya during the colonial period, the
banks showed little interest in the indigenous African population. As branches
of metropolitan banks, they were designed to settle accounts of the colonial
economy and were therefore not interested in encouraging savings amongst
Africans or financing African enterprise (Engberg, 1965; Mkandawire, 1999).
It has been further argued that the banks did little to help even their main
customer base – the white settler community that was dominated by farmers:

‘… these banks lent money to the farmers at [interest rates of] anything
from 8 to 10 per cent. When crisis came [after the First World War]
they operated their traditional policy and shut down on credit at the
moment when it was most required. When European farmers were
mortgaged to the hilt and the wages of Africans were at least halved,
these banks remained woefully prosperous. Throughout the crisis the
Standard Bank of South Africa did not declare a dividend of no less
than 10 per cent… A good deal of property as well as money passed
into their hands during these years. Organised to take money out of the
colony, there is little evidence that the banks have proved adventurous
in promoting industrial development in Kenya.’ Aaronovitch and
Aaronovitch (1947, p. 177)3
Interestingly, the restriction of credit by the three banks led to pressure on
the government to relieve the heavily indebted white farmers. The colonial
government established the Land Bank in 1931 as a source of alternative
credit. However, it has been observed that the private banks benefited more

3 Emphasis added.
20 Kenya’s Financial Transformation in the 21st Century

than farmers, as 39% of the funds of the Land Bank were used to discharge
existing mortgages with private banks and therefore did not increase the total
availability of credit (Aaronovitch and Aaronovitch, 1947).

2.2 Pre-independence growth – 1950 to 1963

It was not until the 1950s that other banks began to be established. These
were mainly single branch banks, headquartered in Nairobi with a focus on
trade finance (Engberg, 1965; Central Bank of Kenya, 1976).
There are other structural features that should be noted. First, there was
no central bank fulfilling the function of lender of last resort. In its place
was the East African Currency Board (EACB) with the limited function of
maintaining a strict parity between the East African shilling and the British
pound.4 Therefore, the supply of credit was fully determined by the commercial
banks. Commercial bank advances consisted of their own resources and funds
borrowed from parent banks. Funds moved freely from parent banks to their
branches, as there were no capital account restrictions. Second, prudential
regulation was very lenient with no statutory liquidity or cash requirement
ratios (Central Bank of Kenya, 1976, 1986).5 Third, there was very little effort
amongst the banks to compete for deposits. Interest rates on deposits and loans
were determined by collective (cartel-type) bank arrangements decided by
the three major banks and subscribed to by the other banks (Engberg, 1965).
Between 1950 and 1963, the levels of deposits, assets and loans held by
commercial banks in East Africa (and therefore Kenya) grew substantially
(see Table 1).

4 The establishment of the EACB in 1919 led to the introduction of the East African florin in 1920 and the East
African shilling in 1922. Prior to that, the currency of use in East Africa was the Indian rupee, due to centuries-old
trade connections between India and East Africa. However the fluctuations in the value of the rupee in relation to
sterling during the First World War led to the establishment of the EACB (Central Bank of Kenya, 1976). The Board,
operating through commercial banks, issued shillings at a fixed exchange rate of 20 East African shillings for every
£1. The Board had all its assets in UK securities and all its currency issues had to be fully backed by foreign exchange
(Hazlewood, 1979).
5 The first three banks to be established during the colonial period were regulated by the Banking Ordinance of 1910.
This Act was repealed and replaced by the Banking Ordinance of 1956, which specified for the first time minimum
capital requirements for banks and established a Registrar of Banks with power to license banks. The minimum
capital was set at 2 million East African shillings (approximately US$0.28 million).
 Transformation of Kenya’s Banking Sector, 2000–2012 21

Table 1: Monetisation, assets and deposits held by banks in East Africa,

1950–1963
Total Local earning Local earning Loans and Loans and
Year deposits assets assets as % of advances advances as % of
(£m) (£m) total deposits (£m) total deposits

1950 64 22 34% 17 27%

1960 87 78 90% 69 80%

1963 121 105 87% 93 77%

Note: It has not been possible to get a breakdown of these figures between the three East African countries (Kenya,
Uganda and Tanzania).
Source: Engberg (1965).

It has been documented that the banks tended to be very conservative, applying
credit standards set by their head offices that were not realistic in the extremely
under-developed countries in which they were operating (Engberg, 1965).
The unwillingness of banks to extend credit led to a situation in the 1950s
where there was an export of capital from the under-developed periphery to
the developed metropole (Maxon, 1992).
The second important point to note is that the safety of the deposits held by the
branches of the main banks did not depend on the quality of assets of these
banks in East Africa, but was linked to the capital and reserves of the parent
banks overseas. Therefore, when large withdrawals of deposits took place in
1955, 1960 and 1963, the banks were able to use the inter-bank borrowing
facilities of their London head office (Abdi, 1977). This point is crucial to keep
in mind for our discussion below on segmentation – foreign banks had already
established a reputation as ‘safe banks’ before independence.
On 30 June 1963, on the eve of independence, there were nine banks operating
in Kenya.6 Table 2 lists these banks.

6 The financial sector also included three private NBFIs: Diamond Jubilee Investment Trust established in 1946;
Credit Finance Corporation established in 1955; and National Industrial Credit established in 1959. In addition,
there were two private housing finance companies: Savings and Loans established in 1949; and East African Building
Society established in 1959 (Central Bank of Kenya, 1972, 1986). Though it has not been possible to find the exact
figures for the asset bases of these financial companies at independence, it would be reasonable to assume that they
were very small compared to the banks. These NBFIs were restricted from raising deposits and were also single
branch institutions.
22 Kenya’s Financial Transformation in the 21st Century

Table 2: Banks operating in Kenya in 1963

Nationality (place Date of
of incorporation) incorporation

Barclays D.C.&O. (presently Barclays Bank) British 1896

National and Grindlays (presently Kenya Commercial Bank) British 1910

Standard Bank (presently Standard Chartered Bank) British 1916

Nederlandsche Handel-Maatschappij Dutch 1951

Bank of India Indian 1953

Bank of Baroda Indian 1953

Habib Bank (Overseas) Ltd Pakistani 1956

Ottoman Bank Turkish 1958

Commercial Bank of Africa Tanzanian 1958

Notes: It has not been possible to establish the exact size of these banks in terms of asset base in 1963. However,
Barclays D.C.&O. was the largest in terms of asset size (Onyonka, 1968, quoted in Maxon, 1992).
Source: Engberg (1965) and Central Bank of Kenya (1986).

In summary, at independence in 1963, the first three banks to be established in

Kenya continued to dominate the banking sector, controlling about 85% of the
total branch network (Engberg, 1965). It is also important to note that the data
in Table 2 highlight that at independence, all banks were foreign owned and
there were no banks that could be termed ‘local’. Furthermore, all non-bank
financial institutions were British owned except Diamond Jubilee Investment
Trust, which was the only financial institution whose ownership could be
termed ‘local’ at independence.7 Finally, all financial institutions primarily
concerned themselves with trade finance and had very little interest in lending.

2.3 Harambee: The creation of government-owned banks – 1963 to 1980

The post-independence bank developments started with the establishment of
the Central Bank of Kenya (CBK) in 1966 after the dissolution of the EACB.
Kenya’s first national currency – the Kenyan shilling (KSh) – was introduced
on 14 September 1966 at the rate of KSh20 to the pound (Central Bank of
Kenya, 1976). At independence in 1963, the prevalent understanding was that
development entailed massive resource mobilisation and banks were seen as key
instruments in this. However, in Kenya, unlike in most other African countries,
there was no wholesale nationalisation of the banks. This can be seen as part

7 Diamond Jubilee Investment Trust was set up by members of the Ismaili community (a sub-community of the Asian-
African community) to commemorate the Diamond Jubilee (60th anniversary) of leadership of His Highness Aga
Khan III of the community.
 Transformation of Kenya’s Banking Sector, 2000–2012 23

of the broader strategy by Kenyan leaders at independence to accommodate

colonial interests and prevent a wholesale migration of foreign capital (Leys,
1975). At independence, the first president Jomo Kenyatta assured the white
settler community:

‘The Government of independent Kenya will not be a gangster

Government. Those who have been panicky…can now rest assured
that the future African Government…will not deprive them of their
property rights of ownership. We will encourage investors…to come to
Kenya… to bring prosperity to this country.’ Quoted in Ndege (2000,
p. 107) and Hazlewood (1979, p. 13).
Therefore international banks – now classified as foreign-owned banks –
including Barclays D.C.&O. and Standard Bank continued to operate in
Kenya.8 Only National and Grindlays Bank was bought out by the Government
of Kenya (GoK) and became the Kenya Commercial Bank (KCB) (Central
Bank of Kenya, 1986).9 In 1974, two US banks were established – the First
National Bank of Chicago and the First National City Bank of New York
(Nasibi, 1992).
In the 1960s, Kenya experienced impressive economic growth, mainly driven
by the commercialisation of African smallholder agriculture. In the first decade
of independence, GDP at constant prices grew at an annual rate of 7.1%
(Hazlewood, 1979). The M2-to-GDP ratio increased from 19% in 1963 to
30% in 1970 (Central Bank of Kenya, 1986). However, the government was
dissatisfied with the pace of adjustment, in particular with the very low loans-
to-deposit ratio of 64.6% in 1969 (Republic of Kenya, 1968).10 It was argued
that:

‘… the urgency of development is so great, that the need for specialized

institutions for the collection of savings and investment cannot be left
to the process of slow evolution.’ Republic of Kenya (1968, p. 558).

8 In the 1970s, Standard Bank became Standard Chartered Bank Ltd and Barclays Bank D.C.&O changed its name to
Barclays Bank International Ltd, both becoming wholly owned subsidiaries of the parent banks in London (Central
Bank of Kenya, 1976).
9 This was part of the resource mobilisation and ‘Africanisation’ strategy of the government discussed below. The
purchase of National and Grindlays Bank was on a willing seller, willing buyer basis. In 1968, the Ottoman Bank
was taken over by National and Grindlays Bank. Then in 1970, an agreement was reached between National and
Grindlays Bank and the government. The bank was split into an international bank in which the government took a
40% share, and the local branch system of the bank, renamed Kenya Commercial Bank, in which the government
took a 60% share. The remaining shares were quoted on the London and Nairobi stock exchanges, respectively
(Hazlewood, 1979).
10 The loans-to-deposit ratio in 1969 was even lower than the 1963 figure of 77%.
24 Kenya’s Financial Transformation in the 21st Century

There was an understanding that economic development entailed massive

resource mobilisation, and that these resources could be raised through banks.
There was also the political reality that needed to be addressed – the need
for visible ownership in the Kenyan economy by African Kenyans – and
the government’s stated policy of ‘Africanisation’ was also pursued through
the financial system. The government also established two new banks – Co-
operative Bank of Kenya and National Bank of Kenya – in 1968. Specialised
credit institutions, or development finance institutions (DFIs) – including the
Industrial & Commercial Development Corporation (ICDC), the Industrial
Development Bank (IBD), the Development Finance Corporation of Kenya
(DFCK) and the Agricultural Finance Corporation (AFC) – were set up to
give loans to Kenyans and also to purchase shares in public corporations
(Grosh, 1991). 11
There was also growth of local financial institutions, termed ‘indigenous’
banks. Between 1971 and 1980, one local private bank and nine local NBFIs
were established (Kariuki, 1993). These financial institutions were mainly
owned by African (Kikuyu) businessmen who had built up capital during the
coffee boom of 1976–1979 due to their close links to President Kenyatta, who
was also from the Kikuyu ethnic group (Throup, 1987). The commercial banks
and NBFIs were largely free from regulatory controls, except the stipulation of
lending and deposit interest rates (Brownbridge, 1998). There was a condition
that banks should extend credit to agriculture amounting to 17% of their
deposits, but this requirement was rarely enforced (Kariuki, 1993).
The M2-to-GDP ratio throughout the 1970s and 1980s remained at
approximately 30%. There was some financial deepening, however, as the
loans-to-deposits ratio grew from 64.6% in 1969 to 80% by 1980. The ratio
of financial institutions’ (banks and NBFIs) assets to GDP grew from 28% in
1971 to 40% in 1980 (Ngugi, 2000).12

2.4 Nyayo: The rise of indigenous and political banks – 1980 to 1990
When President Kenyatta died in 1978, he was succeeded by President Moi,
who was from the Kalenjin community. The watchword chosen by Moi for
his presidency was Nyayo (meaning ‘footsteps’), emphasising continuity with the

11 ICDC was originally incorporated in 1954 as Industrial Development Corporate (IDC) to assist and encourage
medium- and large-scale investment in the industrial sector. In 1973, IDB was set up as a subsidiary of ICDC.
However, ICDC, DFCK and IDB had overlapping and duplicating roles (Grosh, 1991).
12 It should be noted that this ratio is different from the private credit-to-GDP ratio, as it includes public as well as
private lending and also includes liquid assets which are not lent out.
 Transformation of Kenya’s Banking Sector, 2000–2012 25

economic policies of the Kenyatta era by remaining committed to a capitalist

economy with a focus on attracting foreign investment and maintaining policies
of Africanisation of the economy (Maxon and Ndege, 1995).
The 1980s witnessed a large growth in the number of NBFIs from 20 in 1980
to 53 in 1990 (a rise of 165%). The number of banks also grew from 17 to 24
(a rise of 17%).13 The majority of these new financial institutions were owned
by local entrepreneurs (Kariuki, 1993). These local banks fulfilled a very useful
function, as they catered for mainly small and medium-sized enterprises, often
from their own communities, that the foreign-owned and government-owned
banks did not serve (Nasibi, 1992).
However the proliferation of local banks and NBFIs was also facilitated by
several political and regulatory factors. First, regulatory barriers – including the
minimum capital requirements and reserve ratios – were very low compared to
banks (Brownbridge, 1998). In particular, the minimum capital requirements
for NBFIs were extremely low even though they were allowed to take deposits.14
There was a regulatory ‘arbitrage’ between banks and NBFIs, and most
banks (including foreign-owned and government-owned banks) started an
NBFI as a subsidiary to take advantage of this regulatory loophole.15 Second,
political interference subverted prudential criteria in the awarding of licenses,
as Section 53 of the Banking Act gave the minister of finance authority to
grant exemptions to the Act (Brownbridge, 1998).16 Third, many banks had
prominent politicians on their boards and were able to use these connections
to obtain public sector deposits very cheaply (Ndii, 1994; Brownbridge, 1998).
Fourth, the CBK had very little capacity to supervise the growth of non-bank
financial institutions (World Bank, 1989). As will be seen below, these factors
sowed the seeds of weakness in the banking system from the very establishment
of these NBFIs.
Furthermore, during the first decade of the Moi era, due to external and
internal economic factors, Kenya experienced a severe reduction in GDP
growth and macroeconomic imbalances, including declining terms of trade

13 See Table 3. It should be noted that it has been difficult to get data on the exact number of banks that opened and
closed each year. In particular, it has been difficult to establish the exact number of banks in 1983 prior to large
number of bank failures in 1984. Therefore, these trend figures do not capture the full details of the movements in
the number of banks.
14 From 1963 to 1980, the minimum share capital for banks remained KSh2 million and the minimum share capital of
NBFIs was KSh500,000 (Brownbridge, 1998). See Table 4 for a list of capital requirements of the Central Bank of
Kenya from 1956 onwards.
15 This policy was reversed in 1993, as will be discussed below.
16 The Banking Act is Chapter 488 of the Laws of Kenya; the Central Bank of Kenya Act is Chapter 491 of the Laws
of Kenya (see www.centralbank.go.ke).
26 Kenya’s Financial Transformation in the 21st Century

and budget deficits, and was forced into undertaking structural adjustment
policies recommended by the IMF and the World Bank (Ngugi, 2000).17
The banking system was repressed according to the McKinnon-Shaw
hypothesis, as interest rates up to the early 1980s were low and negative in
real terms (Mwega et al., 1990). It was acknowledged that:

‘it had been official policy in Kenya since independence to follow a ‘low
interest rate policy’ in order to encourage investment and to protect the
small borrower.’ Central Bank of Kenya (1986, p. 54)
The main structural adjustment policy relating to the financial sector was a
gradual increase in interest rates, and real lending rates of banks increased
from -2.5% in 1980 to 9% in 1990 (Brownbridge, 1998).
The rapid rise of financial institutions, very poor regulation, shifting political
economy trends and also declining economic growth resulted in the failure of
12 banks between 1984 and 1989 (see Table 3). In December 1989, nine of
these banks were taken over by the government to form the Consolidated Bank
(Ngugi, 2000).18 A more detailed discussion on the reasons for bank failures,
in particular the political economy shifts, is presented below. In 1989, there
was a major amendment to the Banking Act and Central Bank of Kenya Act
establishing stricter guidelines for the licensing of institutions and establishing
single borrower limits (Nasibi, 1992). 19 In 1989, the Deposit Protection Fund
Board was also established to compensate small depositors in case of bank
failures. This institution also assumed responsibility for liquidating failed banks
(Nasibi, 1992).
This section has shown that the banking sector in Kenya immediately prior
to full-scale liberalisation in the 1990s was fragile. Despite the increase in the
number of financial institutions to 94 in 1990, the M2-to-GDP ratio and the
loans-to-deposits ratio of banks remained constant throughout the 1980s at
about 30% and 80% respectively. Furthermore, the ratio of total financial

17 The main external factor was the oil price shocks of 1973 and 1979 and the key internal factor was the drought of
1979 and 1984 (Ngugi and Kabubo, 1998). From an average rate of 7.1% (mentioned above), GDP growth fell to
3.9% in 1980 and then to a low of 0.8% in 1984, but grew again to 5% by 1989.
18 These are Union Bank, Jimba Credit Corporation, Estate Finance, Estate Building Society, Business Finance,
Nationwide Finance, Kenya Savings and Mortgages, Home Savings and Mortgages, and Citizens Building Society
(Nasibi, 1992; Brownbridge, 1998).
19 The Central Bank of Kenya Act was only tinkered with from 1969 to 1984. In 1985, it was overhauled. The key
amendments were that first, applications for the license of banks had to go through the CBK and not directly to
the Minister of Finance; second, minimum capital requirements were increased to KSh15 million; and third, single
borrower limits were set at 100% of share capital (Central Bank of Kenya, 1986). See Table 4 for a list of changes to
capital requirements through the years.
 Transformation of Kenya’s Banking Sector, 2000–2012 27

institutions’ assets to GDP rose only marginally from 40% in 1980 to 41.6%
in 1989 (Central Bank of Kenya, 1986; Ngugi, 2000).20

2.5 Liberalisation – 1990 to 1999

Following the structural adjustment programmes of the 1980s, which were
focused on debt and budget reform and only contained minor financial
sector reforms, Kenya embarked on full-scale financial liberalisation in the
1990s. Unlike other African countries, the official reports of the Kenyan
government lauded the success of the structural adjustment programmes of
the 1980s (Nasibi, 1992).21 Liberalisation of the financial sector was financed
by the World Bank’s Financial Sector Adjustment Credit (FSAC), which was
approved by the Board of the World Bank in June 1989. The theoretical
basis of financial liberalisation was the McKinnon-Shaw hypothesis, in which
government control of interest rates was seen as a key constraint to financial
sector development.22
The key step of full-scale financial liberalisation was the complete deregulation
of interest rates in 1991 (Brownbridge, 1998). In 1992, commercial banks were
authorised to deal in foreign exchange, and in 1993 a market-determined flexible
exchange rate system was adopted for the Kenyan shilling (Brownbridge, 1998).
While liberalisation was taking place, big political changes were also taking
place and in 1992, Kenya had its first multi-party elections. President Moi was
returned to power due to an extremely fractured opposition. However, funding
the elections left the public finances in disarray. In particular, government
borrowing jumped and this is reflected in the Treasury bill rates. In March
1993, the 91-day Treasury bill rate was 25%. This jumped to 46% in April

20 Ngugi (2000) argues that this is because the M2/GDP figure does not take into account assets and liabilities of NBFIs.
She shows that NBFI assets as a percentage of GDP grew from 12.1% in 1980 to 22% in 1984, but dropped again
to 14.5% in 1989, while bank assets as a percentage of GDP were constant at around 28% throughout the decade.
However, she does not give a figure of the loan-to-deposit ratio of NBFIs. It is estimated that the M3-to-GNP ratio
increased from 38% in 1973 to 45% in 1985 (Mwega et al., 1990).
21 It should be noted that in Kenya, the clamour for liberalisation was not only external. Leaders of the private sector,
including several chairmen of the Kenya Association of Manufacturers (the principal manufacturing and trade
lobby group), were calling for a deregulation of interest rates and commodity prices (Nasibi, 1992). Though it
should also be noted that there were differences in positions between export-oriented manufacturers, such as textile
manufacturers, who opposed the liberalisation and import-oriented manufacturers who lobbied for the liberalisation.
22 The references to the McKinnon-Shaw hypothesis are explicit. The objectives of financial liberalisation were stated
as:
‘to encourage mobilisation of savings and contribute to the maintenance of financial stability...and to ensure
that funds flow into those areas which are most productive, and that the biases which have existed against
lending to small business are eliminated.’ Central Bank of Kenya (1988, p. 18), quoted in Kariuki (1995,
p. 6).
28 Kenya’s Financial Transformation in the 21st Century

1993, peaked at 85% in July 1993, and then dropped steadily but remained
still very high at 44% in December 1993.23
This liberalisation of interest rates and exchange rates provided further avenues
for local banks to compete with more established banks, and was an added
stimulus for local bank entry (Brownbridge, 1998; Ndung’u and Ngugi, 1999).
While the 1980s witnessed the rise of African (mainly Kikuyu) banks, the late
1980s and 1990s witnessed the rise of several African (Kalenjin) and Asian-
African banks.24 By the mid-1990s, it is estimated that local banks controlled
about a quarter of the market (Brownbridge, 1998).25 Table 3 shows the growth
in the total number of financial institutions from 1990 to 1993. The total
number of banks grew by 67% and the total number of NBFIs by 13%.

Table 3: Number of financial institutions in Kenya, 1963–2000

1963 1975 1980 1990 1993 1994 1997 1998 2000

Banks 9 14 17 24 40 37 53 53 49

NBFIs 3 8 20 53 60 44 19 15 5

Building
2 2 2 17 11 6 6 4 4
Societies

Total 14 22 39 94 111 87 78 72 58

Source: Engberg (1965); Brownbridge (1998); Central Bank of Kenya (2000a, 2003, 2005).

However, as will be shown below, the experience with liberalisation in terms

of financial deepening was very unsatisfactory.
After 1994, there was a decline in the total number of institutions. This was
partly due to the failure of 15 financial institutions in 1993. Furthermore,
in 1993 the Central Bank of Kenya adopted a universal banking policy and
reduced the regulatory advantages that were available to NBFIs. This led to
several NBFIs converting to banks or merging with their parent bank, and to
a consolidation of the banking sector (Ngugi, 2000). However, towards the
end of the 1990s, the banking sector still remained fairly fragile and six more
banks were put under CBK statutory management towards the end of 1998.

23 Data for Kenyan GDP growth rates, inflation rates, exchanges rates and T-bill rates from 1990–2005 are displayed
in Appendix 7.
24 The Asian-African community is a new label of identity used by people of Indian origin who settled in Kenya (Asian-
African Heritage Trust, 2000). This community is often also referred to as Kenyan-Asians, East African-Asians or
South Asian-Kenyans.
25 It has not been possible to get disaggregated data at the segment level on banks’ assets for the periods before 2000.
 Transformation of Kenya’s Banking Sector, 2000–2012 29

3 Banking sector industry trends, 2000–2012

The banking sector as a whole changed significantly during this period,
facilitated by regulatory changes, the rise of large locally owned private banks
and increased competition.

3.1 Regulatory changes

Throughout the late 1990s and up to 2000, the CBK Act and the Banking Act
were amended to improve regulation and supervision of banks.26 In October
1995, key amendments included the harmonisation of banks’ accounting
financial years, the approval of bank auditors by the CBK and the reduction
of the single borrower limit to core capital ratio from 100% to 25% (Central
Bank of Kenya, 1995, 1996).27 In 1997, the responsibilities for appointing the
governor and the management of the CBK were transferred to a board of
directors appointed by the president, rather than directly by the minister of
finance, in order to reduce political interference in the Bank (Central Bank of
Kenya, 1997). In response to another spate of bank failures in 1998, several
changes were brought into force in 1999. Detailed guidelines on provisioning
for non-performing loans were set out and a requirement was established for
banks to publish their accounts, including details on their non-performing
loans, in the national press (Central Bank of Kenya, 1999). Minimum capital
was increased to KSh200 million by December 1999. In October 2000,
minimum capital requirements were increased to Ksh250 million. Table 4
summarises the changes in the minimum capital requirements for banks in
Kenya from 1956 onwards.
Also in October 2000, guidelines were issued requiring banks to conform to
the Basel Capital Accord in terms of the composition of capital, and also new
regulatory capital ratios were specified. The October 2000 guidelines also
reinforced the single borrower limits to 25% of core capital, restricted lending
to insiders to 20% of core capital, defined a large exposure as 10% of core
capital, and further restricted lending to all large borrowers to five times the
core capital (Central Bank of Kenya, 2000b).

26 President Moi did not contest the December 2002 elections and in 2003, President Mwai Kibai became the third
president of Kenya as head of NARC (the National Rainbow Coalition), a coalition of parties of which the two
largest were the NAK (National Alliance Party of Kenya) and LDP (Liberal Democratic Party of Kenya).
27 The single borrower limit is aimed at reducing exposure to one borrower. The previous limit of 100% meant that a
single non-performing loan to one borrower could wipe out the entire capital of a bank.
30 Kenya’s Financial Transformation in the 21st Century

Table 4: Regulatory minimum capital requirements for banks in Kenya,

1956–2012
Year KSh million US$ million

1956–68 2 0.28–0.28

1968–80 2 0.28–0.27

1980–82 5 0.67–0.46

1982–85 10 0.92–0.61

1985–92 15 0.91–0.41

1992–1999 75 2.07–1.37

31/12/1999 200 2.74

31/12/2000 250 3.20

31/12/2005 250 3.45

31/12/2009 350 4.61

31/12/2010 500 6.2

31/12/2011 700 8.7

31/12/2012 1000 12.4

Source: Brownbridge (1998), Central Bank of Kenya (2000b, 2006, 2008).28

The Central Bank of Kenya also passed regulations allowing the establishment
of credit registries. The legislation was tabled in Parliament in 2006 and
passed as a Bill in 2008. In 2009, the first company – Credit Reference
Bureau Africa Limited – was licensed to operate a credit reference bureau
and began operations in July 2010. In 2011, a second company, Metropol
Credit Reference Bureau Limited, was licensed.
As will be seen below, following the introduction of these guidelines and the
high levels of provisioning undertaken by banks, non-performing loans have
fallen.
The Central Bank of Kenya also brought in regulations that enabled innovation
in the banking sector, in particular regulations on agent banking enacted in
2011. Agent banking is an arrangement by which licensed institutions (banks
and microfinance banks) engage third parties to offer specified banking services
on behalf of the institution. In Kenya, agent banking is governed by the
Prudential Guideline on Agent Banking (CBK/PG/15). As will be seen below,
this has enabled banks to increase access to finance throughout the country.

28 The minimum capital requirements were stipulated in Kenyan shillings and remained constant during each of the
periods. The dollar value fluctuates depending on the exchange rate and the values quoted are for the beginning and
end of the period.
 Transformation of Kenya’s Banking Sector, 2000–2012 31

In the rest of this section, we discuss general trends in the financial sector in
Kenya, focusing on depth, efficiency, stability and access.

3.2 Changes in financial sector depth

Kenya has experienced steady increases in GDP growth, with the exceptions
of 2002 and 2008 when there was very low growth linked to election-related
political instability (see Figure 1). Kenya has also experienced some increases
in investment, with gross fixed capital formation as a percentage of GDP
increasing from 16.71% in 2000 to 20.39% in 2012, with a dip between 2002
and 2004.
The key area for concern is the savings rate. The ratio of domestic savings to
GDP increased from 7.28% in 2000 to 10.2% in 2005, but has fallen steadily
since to 2.9% in 2012. As we will see below, the financial sector has steadily
deepened since 2000, but this growth is not translating into an increase in
gross savings. It should be noted that a key argument of the McKinnon-Shaw
theories that formed the basis of financial liberalisation was that a freely
determined market rate of interest would increase deposits and, in turn, savings
(McKinnon, 1973; Shaw, 1973). However, the experience of most countries
post liberalisation has been similar to that of Kenya – financial liberalisation
and an increase in financial depth have not led to an increase in savings – and
it has been recognised that the causal nexus between finance and savings still
has to be clarified (Mavrotas, 2005).29 This raises a key concern, as Kenya’s
Vision 2030 goals entail a significant increase in domestic savings to 30% by
2030 with an explicit view that this increase in savings will be propelled by
the financial sector (Republic of Kenya, 2007).
Kenya has also experienced growth in all three main indicators of financial
deepening (Figure 2). The liquid liabilities-to-GDP ratio steadily increased
from 37.5% in 2000 to 47.4% in 2011. Similarly, the deposits-to-GDP ratio
also increased from 29.5% in 2000 to 42.5% in 2011. The private credit-to-
GDP ratio has not exhibited a similar increase. It hovered around 27% but
experienced some growth from 2008, rising to 33.6% in 2011. Overall it
can be argued that the country has made good strides in terms of increasing
financial depth.

29 The causal nexus between savings and growth has also been questioned, with some economists suggesting that the
causation may run in the opposite direction – from growth to savings; see Mavrotas (2005) for a summary of the
debates.
32 Kenya’s Financial Transformation in the 21st Century

Figure 1: Trends in GDP growth, savings and investments, 2000–2012

25

20

15
Percent

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Real GDP growth (%) Gross domestic savings (% of GDP)

Gross fixed capital formation (% of GDP)

Sources: World Bank META database.

Figure 2: Trends in financial sector depth, 2000–2011

50

45

40

35

30
Percent of GDP

25

20

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Liquid liabilities Bank deposits

Private sector credit

Source: World Bank Financial Sector Database (2000, updated 2009, 2012 and 2013).
 Transformation of Kenya’s Banking Sector, 2000–2012 33

3.3 Efficiency, profitability and concentration

A key measure of market structure and competition is the concentration of
the banking sector. During the period 2000–2012, the share of the top three
banks in Kenya in terms of total assets fell from 64.4% in 2000 to about 40%
in 2012 (see Figure 3). Overall, this implies that competition has increased in
the banking sector. The concentration ratios in Kenya are also low compared
to global standards (see Table 5).
It should be noted that several authors have attributed the poor performance
of the Kenyan banking system and African banking systems in general in the
1990s – in particular the high interest rate spreads – to their high concentration
ratios and oligopolistic nature (Ncube and Senbet, 1997; Kamau et al., 2004).
As the discussion below shows, despite the increase in competition, interest
rate spreads in Kenya still remain high.

Figure 3: Banking concentration, 2000–2012

70

60

50

40
Percent

30

20

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Concentration ratios (assets of top three banks as % of total)

Source: World Bank Financial Sector Database (2000, updated 2009, 2012 and 2013).

Table 5: Global data on mean bank concentration ratios

2000 2005 2010

SSA 84.0 77.2 72.8

Upper-middle 64.4 64.1 61.1

High income 64.9 64.0 63.6

Kenya 64.4 51.6 42.9

Source: Authors’ calculations from the World Bank Financial Sector Database (2000, updated 2009, 2012 and 2013).
34 Kenya’s Financial Transformation in the 21st Century

Figure 4 displays the trend in banking sector efficiency. Interest rate spreads
and interest rate margins are the most common measure of bank inefficiency.
The spread is often thought of as a ‘premium in the cost of external funds’
introduced due to informational and enforcement frictions (Gertler and Rose,
1994; Honohan and Beck, 2007).30 The lower the margin and the spread, the
higher the efficiency of the banking system. It should be noted that there is a
difference between bank-level efficiency and overall banking system efficiency.
In using management theory, a more efficient bank would have higher margins
and higher profitability. At an economy-wide level, however, theory suggests
that in a competitive banking system, these profits should be competed away
and hence lower margins and lower spreads are a sign of overall efficiency of
the banking system.

Figure 4: Banking sector efficiency, 2000–2012

16

14

12

10
Percent

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net interest margin Interest rate spread

Source: World Bank Financial Sector Database (2000, updated 2009, 2012 and 2013).

The figure shows that the net interest margin increased from 6.43% in 2000
to 8.17% in 2011, and hence efficiency has worsened. Interest rate spreads
decreased from 14.24% in 2000 to 7.8% in 2005, but have remained steady
since then. In 2012, the interest rate spread was about 8.15%.31 This is the key
intractable issue in the banking system. There is agreement amongst economists
and policymakers that the interest rate spread in Kenya is high. Theory predicts
that countries with greater financial depth have lower interest rate spreads,

30 The net interest margin is the accounting value of a bank's net interest revenue as a share of its interest-bearing (total
earning) assets.
31 Interest rate spread calculated as the difference between the lending rate and the deposit rate.
 Transformation of Kenya’s Banking Sector, 2000–2012 35

yet Kenya has achieved an increase in depth with a relatively minor decrease
in spreads (World Bank, 2013). However, two recent papers have highlighted
that the determinants of interest rate spreads in Kenya are still debated. While
some authors argue that the unstable macro environment, including exchange
rate volatility, contributes to the high spread (World Bank, 2013), others have
argued that macroeconomic factors such as economic growth and inflation
are not useful in explaining high spreads (Were and Wambua, 2013). Both
studies emphasise the role of internal factors such as overhead costs and high
profitability, and both indicate that the larger banks in Kenya enjoy a higher
spread. We will discuss later in this chapter the segmented nature of the
banking system in Kenya, as this partly explains why despite the increasing
depth of the banking sector and reduced concentration, interest rate spreads
still remain high.
The profitability of the banking sector (as measured by return on assets and
return on equity) has been steadily increasing (except for dips in 2002 and
2008). Figure 5 shows that return on assets (ROA) increased from 0.8% in
2000 to 3.5% in 2011, and return on equity (ROE) increased from 14.2%
in 2000 to 23.09% in 2011. Again, this shows that despite the reduction in
concentration and the increase in competition, sustained interest rate margins
and spreads have meant that banks are able to maintain high profit margins.

Figure 5: Banking sector profitability, 2000–2011

4.5 30

4.0
25
3.5
Return on assets (percent)

Return on equity (percent)

3.0 20

2.5
15
2.0

1.5 10

1.0
5
0.5

0.0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Return on assets Return on equity

Source: World Bank Financial Sector Database (2000, updated 2009 and 2012 and 2013).
36 Kenya’s Financial Transformation in the 21st Century

3.4 Banking sector stability

Banking sector stability is measured by looking at three factors: capitalisation,
liquidity and absence of non-performing loans.
Figure 6 shows the changes in bank capitalisation ratios for the banking
sector in Kenya for 2000, 2005, and 2012. It shows that there has been a
small increase in all three important ratios: total capital to total risk-weighted
assets, core capital to total risk-weighted assets, and core capital to total
deposits. Furthermore, it shows that the banking sector in Kenya has a level
of capitalisation well above the regulatory minimums. The figure also shows
that banks in Kenya are very liquid. With an average liquidity rate of 42%,
the banking sector is well above the minimum required liquidity rate of 20%.

Figure 6: Banking sector capitalisation and liquidity, 2000, 2005 and 2012
45
42% 42% 42%
40

35

30

25
Percent

23%
20% 20%
20 17%
17% 17%
16% 15%
15 14% 14%
12%
10 8% 8%

0
Total capital/risk Core capital/risk Core capital/total Liquidity ratio
weighted assets weighted assets deposits

Regulatory minimum 2000 2005 2012

Source: CBK Supervision Report (various years).

Figure 7 shows that the key improvement in the banking sector in Kenya
between 2000 and 2012 was the large reduction in non-performing loans
(NPLs). The NPL ratio fell from an average of 37% in 2000 to 5% in 2012. This
can be attributed to the stricter regulatory regime that was put in place after
2000, the introduction of credit reference bureaus and consistent economic
growth over the period.
 Transformation of Kenya’s Banking Sector, 2000–2012 37

Figure 7: Non-performing loans, 2000–2012

40

35

30

25
Percent

20

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total non-performing loans/total loans

Source: CBK Supervision Report (various years).

Another study, which carried out stress tests on the Kenyan banking sector
using data from 2007 and 2008, suggests that the banking sector is resilient
to shocks such as an increase in bad debt provisions by 50% and a reduction
in performing loans by 50%. However, the extreme shock of an increase in
provisions by 100% would lead to 17 banks failing to meet the minimum capital
standards (Beck et al., 2010).32 Furthermore, as the global financial crisis of
2008 showed, high liquidity in a banking system can be an illusion that can
quickly dry up if all banks become illiquid at the same time (Davidson, 2008;
Nesvetailova, 2010). While this may not be a concern for the moment, it
may become more important as the Kenyan banking system becomes more
integrated with the regional and global banking systems.

3.5 Access to finance

The most significant impact of the transformation of the banking sector has
been on outreach and access. While Kenya’s increase in financial inclusion is
often told in terms of the mobile money revolution, the increase in commercial
bank outreach has been just as important.
The latest FinAccess survey showed that the proportion of the adult population
using different forms of formal financial services stood at 66.7% in 2013
compared to 41.3% in 2009 and 27.4% in 2006. Similarly, the proportion of

32 Data used to stress test the banking system are not in the public domain and therefore we cannot repeat these tests.
38 Kenya’s Financial Transformation in the 21st Century

the adult population totally excluded from financial services declined to 25.4%
in 2013 from 31.4% in 2009 and 39.3% in 2006 (CBK and FSD Kenya, 2013).
Table 6 shows that bank access increased by 64% between 2006 and 2013.

Table 6: Financial service use (percentage of adult population currently using)

FinAccess FinAccess FinAccess
Financial service 2006 2009 2013
(n=4,418) (n=6,343) (n=5,849)

Banks 17.8 21.5 29.2

SACCO 13.1 9.0 11.0

MFI 1.7 3.4 3.5

MMT registered -- 27.9 61.6

Government 1.1 0.3 1.0

ROSCA 29.3 31.7 21.4

ASCA 5.7 8.0 8.8

Local shop 22.8 24.3 5.6

Informal moneylender 0.7 0.4 0.4

Employer loan 0.9 0.5 0

Buyer loan 0.9 1.2 1.1

Family or friend (saving or loan) 17.5 17.5 11.0

Source: FinAccess Reports 2006, 2009 and 2013.

On the supply side, the increase in outreach can be assessed by looking at the
availability of access points and the uptake of accounts. For access points, two
common measures are bank branches and ATMs, while for accounts the key
measure is the number of deposit accounts. In the period for which data are
available (from 2004 to 2012), there was a marked increase in bank branches
and ATMs both in terms of numbers and geographic coverage (see Figure 8
and Figure 9).
 Transformation of Kenya’s Banking Sector, 2000–2012 39

Figure 8: Increase in number of branches and ATMs (per 100,000 adults)

12

10
Number per 100,000 adults

0
2004 2005 2006 2007 2008 2009 2010 2011 2012

Commerial bank branches

ATMs
Source: IMF Financial Access Survey (various years).

Figure 9: Increased geographic coverage of branches and ATMs (per 100,000

adults)
4.5

3.5
Number per 1,000 sq km

2.5

1.5

0.5

0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Commercial bank branches
ATMs
Source: IMF Financial Access Survey (various years).

During the same period there was also a six-fold increase in the number
of deposit accounts – from 2.5 million accounts in 2005 to 17.6 million
accounts in 2012 (Figure 10). This growth significantly exceeded the growth
in population, with the number of deposit accounts per 1,000 adults therefore
increasing from 50 to 662. As we will discuss in Section 4, this growth has
mainly come from the large private banks.
40 Kenya’s Financial Transformation in the 21st Century

Figure 10: Increase in deposit accounts

20,000 700
18,000
600

Number of accounts per 1,000 adults

Number of accounts (’000)

16,000
14,000 500

12,000
400
10,000
300
8,000
6,000 200
4,000
100
2,000
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012

Deposit accounts ('000) Deposit accounts per 1,000 adults

Source: CBK Supervision Reports (various years).

3.6 Patterns of lending

We now discuss the performance of the banking sector in terms of its
contribution to the real economy. Figure 11 shows the contribution to GDP of
three main sectors of the economy – agriculture, manufacturing and finance –
for 2000, 2005 and 2012. It shows that despite growth in the last decade, there
has been little structural transformation of the economy. The contribution of
agriculture to GDP dropped slightly from 28.4% in 2000 to 25.9% in 2012.
The contribution of the financial sector increased slightly from 3.5% to 5.2%
in the same period. A key concern is that the contribution of the manufacturing
sector dropped from 10.3% in 2000 to 9.2% in 2012. Meeting Kenya’s Vision
2030 goals requires a structural transformation of the economy, in particular
growth in the manufacturing sector. A recent government policy document
stated that ‘[t]he overall goal for the [manufacturing] sector over the next five
years will be to increase its contribution to GDP by at least 10 per cent per
annum’ (Republic of Kenya, 2012). However, it is not clear that the financial
sector is supporting this goal.
 Transformation of Kenya’s Banking Sector, 2000–2012 41

Figure 11: Contribution of sectors of the economy to GDP in 2000, 2005 and
2012
30 28.4
25.9
25 23.8

20
Percent of GDP

15

10.3 10.5
9.2
10

5.2
5 3.5 3.4

0
Agriculture sector Manufacturing sector Financial sector

2000 2005 2012

Source: Kenya Economic Survey (various years).

Figure 12 shows the change in structure of lending to different sectors of

the economy. Though agriculture still represents 25.9% of GDP, lending to
agriculture as a percentage of total lending dropped from 8.7% in 2000 to
4.9% in 2012. Furthermore, lending to manufacturing dropped from 21.4%
in 2000 to 13.5% in 2012. The main growth in credit is reflected in lending to
households, which increased from 3.3% in 2000 to 24.6% in 2012. It should
be noted that in developing countries, not all lending to households should
be considered as ‘consumption’ or unproductive lending. It is known that
people leverage their borrowing (whether from banks, microfinance institutions
or SACCOs) to invest in productive areas, including agriculture and small
enterprises (Johnson, 2004). A more detailed analysis from both the demand
and supply side would be needed to classify what proportion of household
lending is used for consumption versus productive activities. However, overall
the analysis does raise concerns that the changing structure of lending does
not reflect the overall goals of the country.
Overall, this section shows that the banking sector has deepened, and has
become less concentrated and more stable since 2000. Furthermore, financial
access has increased significantly. The section also shows that lending to key
sectors of the economy, including agriculture and manufacturing, has been
decreasing. This raises the question of the extent to which the financial sector
can assist in structurally transforming the Kenyan economy as envisioned in
the Vision 2030 goals.
42 Kenya’s Financial Transformation in the 21st Century

Figure 12: Changing structure of lending to different sectors in 2000, 2005 and
2012 (percentage of total lending)
30

25 24.6

21.4
19.8
20 18.9

16.3
Percent

15 13.5 13.3 13.3

12.1

10 8.7 8.6
8.3 7.8

4.9 5.2
5 3.9 3.8
3.3

0
Agriculture Manufacturing Financial Household Real estate Trade
services

2000 2005 2012

Source: Kenya Economic Survey, CBK Supervision Report, CBK Statistical Bulletin (various years).

4 Segmentation in the banking sector in Kenya

It has been recognised that the banking sector in Kenya is segmented and that
this segmentation is the source of low competition, inefficiency and fragility
(Beck et al., 2010; Upadhyaya, 2011; Sichei et al., 2012). Upadhyaya (2011)
shows that the poor performance of the banking sector in Kenya in 2005, in
particular the high levels of non-performing loans and interest rate spreads,
can be attributed to the segmented market. The analysis showed that each
segment faced clients of different size and type, and that this segmentation has
a strong impact on the performance of banks in each of the segments in terms
of lending decisions and deposit mobilisation. The analysis further showed
that segmentation is based partly on economic factors such as the size of banks
and structure of ownership, but largely on social factors that determine the
trust between banks and their clients.
In this section, we analyse the performance of each of the segments of the
Kenyan banking sector in depth to understand their evolution from 2000
to 2005 and to 2012. We show that there have been significant changes to
the segmented nature of the market. The gains in terms of access in the
last ten years can be attributed to the innovative practices of banks in the
 Transformation of Kenya’s Banking Sector, 2000–2012 43

large privately owned banks segment. However, segmentation has not been
completely eroded, and this partly explains structural features such as the
persistent interest rate spread.
We use the same definition for segments used in Upadhyaya (2011) – foreign-
owned banks (FOBs), government-owned banks (GOBs), large private locally
owned banks (LPOBs), and small and medium private locally owned banks
(SPOBs). 33 Foreign- and government-owned banks are classified as such if
foreign or government shareholding is more than 50%.34 Privately owned
banks are classified as LPOBs or SPOBs based on an economic measure – the
asset size of the bank. Banks with total assets of KSh50 billion (approximately
US$580 million) or more are classified as LPOBs.35 This definition is based on
the convention used by bankers in Kenya. The definition recognises that banks
are segmented along both ownership and size lines. Furthermore, both size
and ownership affect the perceived reputation of banks in the market, which
affects their ability to raise deposits.36 Key data points used are 2000, 2005 and
2012. The year 2000 is used as a starting point as data at the bank level are
not available before then; 2012 is used as the end point as 2013 data were not
available at the time the analysis of this chapter was initiated; and 2005 is a
key middle point as significant transformation of the banking sector took place
after this date, with Equity Bank converting from a building society in 2004.

4.1 Share of segments, 2000 to 2012

Figure 13 and Table 7 show the shares of the segments in 2012 and the
change in shares in terms of total assets between 2000 and 2012. The figures
highlight the stark contrast in terms of market share and number of banks
in the different segments. In 2012, there were 12 banks controlling 32.8% of
FOB market share. Even within the FOB segment there are differences, with
the four main banks – Barclays Bank, Standard Chartered Bank, Citibank and
CFC Stanbic – controlling 25% of the total market.37 In the LPOB segment in
2012, there were six banks controlling 34.5% of the market and in the GOB
segment, there were four banks controlling 17.3% of the market. However, in

33 A list of banks in each segment is given in Appendix 2.

34 In the case of Kenya Commercial Bank (KCB), government ownership is not more than 50% but the government
has a controlling interest through other shareholders, including the National Social Security Fund (NSSF).
35 This is based on the mean exchange rate as at 31 December 2013 of KSh86.03 to US$1.
36 The Central Bank of Kenya does not use ownership as a category but size. Large banks are those that control more
than 5% of total assets; medium banks are those that control between 1% and 5% of the market; and small banks are
those that control less than 1% of the market. Beck et al. (2010) do carry out analysis by ownership, though defined
slightly differently from this chapter. They use four categories: foreign, private domestic, government owned and
government controlled.
37 The other FOBs are smaller banks serving niche clients.
44 Kenya’s Financial Transformation in the 21st Century

the SPOB segment, there were 18 banks controlling 15.4% of the market. This
stark difference means that the concentration ratio (discussed above) reveals
little about the true nature of competition in the banking sector.

Figure 13: Share of segments, 2012

SPOB
15% FOB
33%

LPOB
35% GOB
17%

Source: Authors’ calculations from bank financial statements.

Table 7: Change in share of assets by segment, 2000–2012

Total no. of Total no. of
Share of Share of Share of Difference
banks in banks in
segments segments segments in share
segment segment

2000–
2000 2005 2012 2005 2012
2012

FOB 43.6% 40.4% 32.8% -10.8% 10 12

GOB 25.5% 18.4% 17.3% -8.2% 4 4

LPOB 19.7% 30.0% 34.5% +14.8% 9 6

SPOB 11.2% 11.2% 15.4% +4.2% 18 21

TOTAL 100% 100% 100% 41 43

Source: Authors’ calculations from bank financial statements.

The key change that has occurred is the rising share of the LPOB segment
and the falling share of both the FOB and GOB segments (see Figure 14).
In 2000, the LPOB segment controlled 19.7% of total assets in the banking
sector. This grew to 30% in 2005, and 34.5% in 2012.38 The FOB segment
steadily lost its share, from control of 43.6% of the market in 2000 to 32.8%
in 2012. Similarly, the GOB segment also saw its share fall from 25.5% in
2000, to 18.4% in 2005, to 17.3% in 2012. The SPOB segment, meanwhile,
managed to marginally increase its share from 11.2% in 2000 to 15.4% in

38 The number of banks in this segment has fallen as one bank was taken over by a bank in the FOB segment and two
other banks were moved to the SPOB segment because they no longer met the classification criteria.
 Transformation of Kenya’s Banking Sector, 2000–2012 45

2012. Overall, while banks in Kenya have generally experienced growing

balance sheets since 2000, banks in the LPOB segment have pursued strategies
that have either increased or maintained their proportionate share of total
assets. In the sections that follow, we discuss the portfolio characteristics of the
segments at a broad level and then discuss each segment in detail.

Figure 14: Share of segments, 2000, 2005 and 2012

100
11.2% 11.2% 15.4%
90

80 19.7%
30.0%
70
34.5%
60
SPOB
25.5%
Percent

50 LPOB
18.4%
40 17.3% GOB

30 FOB

20 43.6% 40.4%
32.8%
10

0
2000 2005 2012
Source: Authors’ calculations from bank financial statements.

4.2 Portfolio characteristics of segments, 2000 to 2012

We now discuss the portfolio characteristics of the different segments of the
banking sector in Kenya. The dataset used for this analysis is individual bank
balance sheets, with two data points: average for 2000–2005 and then 2012.39
The indicators we focus on are return on assets, ratio of capital to risk weighted
assets, ratio of loans to total assets, ratio of government securities to total
loans, total loans on total deposits, non-performing loans and cost of funds.40
Table 8, Figure 15 and Figure 16 show the portfolio characteristics of the
segments and the changes in these characteristics between 2000–2005 and
2012.

39 It should be noted that before 2000, banks followed different reporting standards and therefore financial statements
are not comparable.
40 Cost of funds is calculated as interest on customer deposits plus interest on borrowed funds divided by total deposits
plus borrowed funds.
46 Kenya’s Financial Transformation in the 21st Century

Table 8: Change in key indicators by segment, 2000–2005 and 2012

Segment FOB GOB LPOB SPOB

2000– 2000– 2000– 2000–

2012 2012 2012 2012
2005 2005 2005 2005

Return on assets 3% 2.5% 1% 2.2% 3% 4.9% 0% 1.9%

Core capital/
total risk- 27% 32% 23% 20% 25% 18% 30% 26%
weighted assets

Total loans/total
40% 48% 53% 56% 50% 59% 52% 58%
assets

Government
securities/total 117% 91% 26% 50% 38% 27% 31% 42%
loans

Total loans/total
58% 64% 153% 76% 82% 77% 158% 77%
deposits

Total NPLs/total
9% 4% 46% 8% 16% 6% 28% 8%
loans

Cost of funds 3% 6.3% 4% 7.5% 5% 5.8% 6% 8.40%

Source: Authors’ calculations from bank financial statements.

Figure 15: Return on assets – comparison within and across segments,

2000–2005 and 2012
5 4.9%

3% 3%
3
2.5%
Percent

2.2%
1.9%
2

1%
1

0%
0
2000-2005

2012

2000-2005

2012

2000-2005

2012

2000-2005

2012

FOB FOB GOB GOB LPOB LPOB SPOB SPOB

Source: Authors’ calculations from bank financial statements.
 Transformation of Kenya’s Banking Sector, 2000–2012 47

Figure 16: Core capital/risk-weighted assets – comparison within and across

segments, 2000–2005 and 2012
35
32%
30%
30
27%
26%
25%
25 23%
20%
20 18%
Percent

15

10

0
2000-2005

2012

2000-2005

2012

2000-2005

2012

2000-2005

2012
FOB FOB GOB GOB LPOB LPOB SPOB SPOB
Source: Authors’ calculations from bank financial statements.

4.3 Foreign-owned bank segment

The data show that the FOB segment has contracted both in terms of
proportion of assets and also in terms of relative performance. For the period
2000 to 2005, ROA at 3% was highest for the FOB segment. In 2012, with
ROA of 2.5%, it performs better than the GOB and SPOB segment but not
as well as the LPOB segment. It should be noted that within the FOB segment,
there is variation in performance. Two of the larger foreign-owned banks –
Citibank and Barclays Bank – enjoyed ROA of 10.4% and 7%, respectively.
UBA Bank, a new entrant with headquarters in Nigeria, has a very poor ROA
performance of -13.6%. The FOB segment remains the most conservative
with the highest level of capitalisation, the lowest level of lending on assets
and the highest level of investment in government securities compared to
the other segments in 2012. Due to conservative lending policies, the FOB
segment has historically had the lowest non-performing loan ratio, and this is
also evident in 2012. Finally, if we look at the cost of funds, we notice a change
between 2000–2005 and 2012. At 3%, the cost of funds for the FOB segment
was the lowest of all the segments in 2000–2005, but at 6.3% it was higher
than the LPOB segment in 2012. This increase was due the new entrants in
this segment and increased diversity of players. Barclays Bank, with its large
48 Kenya’s Financial Transformation in the 21st Century

branch network and strong reputation, had a cost of funds of only 1.7% and
Citibank had a cost of funds of 3.7%. UBA Bank and Bank of Africa, both
new entrants to the markets and banks that are headquartered in West Africa,
had very high costs of funds in 2012 of 9.72% and 9.48%, respectively. This
may reflect their lack of reputation in the market.41
Overall, it can be said that the FOB segment maintains a significant if falling
share of the market. The segment also changed between 2000 and 2005,
as there is more diversity within this segment with some new entrants. The
discussion shows that even within the FOB segment there is variation of
performance based on size, length of presence in Kenya and location of the
parent bank, all of which affect the reputation of the banks.

4.4 Government-owned bank segment

The data show that though the share of the GOB segment declined between
2000–2005 and 2012, the portfolio characteristics were much improved. In
particular, the very high NPL ratio of 46% in 2000–2005 was reduced to
8% in 2012.42 This is still higher than the NPL ratio of the FOB and LPOB
segments, but reflects the policy of the regulator to restructure the banks,
in particular the Kenya Commercial Bank. The liquidity of the sector as
measured by total loans/deposits also improved from 153% in 2000–2005
to 76% in 2012. The ROA for the sector, at 2.2% in 2012, also improved.
The main change between 2000–2005 and 2012 was the increase in cost of
funds. In 2000–2005, the cost of funds of GOBs, at 4%, was higher than that
of FOBs but much lower those of LPOBs and SPOBs. At 7.5% in 2012, the
GOB segment now has a cost of funds lower only than the SPOB segment.
There is variation within the segment, with the Kenya Commercial Bank,
the largest bank in 2012, having a cost of funds of only 4.6%. In contrast,
Consolidated Bank had a very high cost of funds of 11% and National Bank
of Kenya had a cost of funds of 6.6%. In 2005, these two banks had a cost
of funds of 1.61% and 2.6%, respectively.
Overall it can be said that the GOB segment between 2000–2005 and 2012
improved in terms of several performance ratios. However, its overall share
of the market was reduced and the segment also had reduced ability to raise
funds very cheaply as it could in the past.43

41 It can be hypothesised that these smaller FOB banks are not viewed by the market as foreign-owned banks but small
privately owned banks.
42 Refer to the historical section above for explanation of sources of high NPLs.
43 This was partly due to a change in government policy whereby it is no longer mandatory for government parastatals
to keep funds in government-owned banks.
 Transformation of Kenya’s Banking Sector, 2000–2012 49

4.5 Large privately owned bank segment

This is the segment that experienced the most significant change between
2000–2005 and 2012. The segment’s share of total assets increased from
19.7% in 2000 to 34.5% in 2012. In 2012, this segment had the highest ROA
(4.9%) of all segments and the lowest cost of funds, at 5.8%. This is the key
change within the segments between 2005 and 2012. In 2005, FOBs and
GOBs had the lowest overall cost of funds, followed by LPOBs and SPOBs.
In 2012, however, LPOBs has the lowest cost of funds followed by FOBs,
GOBs and SPOBs.44 The LPOB segment is also the least conservative with
the highest total loans-to-total assets ratio of 59% and the lowest investment
in government securities as a proportion of total loans (27%), but it still has
a low NPL ratio of 6%. Most of the growth in this sector can be explained
by the rise of Equity Bank. In 2005, Equity Bank was the 13th largest bank in
Kenya with a market share of 1.8%. By 2012, it was the second largest bank
in Kenya with 9.3% of the market.45 Equity Bank started as a microfinance
bank and has received numerous accolades due to its focus on making financial
services available to the poor and the ‘unbanked’ (Equity Bank Ltd, 2009).
Studies have attributed its success to developing innovative products, including
changing its fee structure from monthly ledger fees to a transaction fee-based
model, ‘no-collateral’ loans, a customer focus, investment in human resources
and investment in technology (Coates, 2007; Wright and Cracknell, 2008).
Furthermore, Equity Bank used the agency banking model to increase access
to finance. However each of the banks in the LPOB segment has made strides
in either growing or maintaining its market share in a growing market (see
Appendix 3). For example, Diamond Trust Bank grew its asset share from
2.72% in 2005 to 4.06% in 2012 by focusing on small and medium-sized
enterprises. Overall, there is a need to study the competitive strategies of
other banks in the LPOB segment to understand how they have been able to
build their reputation and asset base so as to break the historical dominance
of the FOBs and GOBs.

4.6 Small privately owned bank segment

We now turn to the SPOB segment. As mentioned earlier, this segment has
over 18 small banks. These banks were able to increase their share of the
market from 11.2% in 2005 to 15.4% in 2012. Furthermore, they remain
well capitalised. At 26%, the average core capital-to-risk-weighted ratio is

44 Again there are differences within this segment. Equity Bank, with its large branch network, has a cost of funds of
2.9% and I&M Bank has a cost of funds of 7.9%.
45 Refer to Appendix 3 for the changing shares of specific banks in the LPOB segment.
50 Kenya’s Financial Transformation in the 21st Century

lower than for FOBs but higher than for GOBs and LPOBs. However, banks
in this segment still experience difficulties. They are not conservative, with a
total loan/total assets ratio and a total loans/total deposits ratio very similar
to the LPOB segment. However, with a ROA of 1.9%, this segment has the
lowest ROA and the highest cost of funds. Overall, this shows that the SPOB
segment still faces significant barriers in terms of competing with banks in other
segments. Their inability to exert competitive pressure on the other segments
has implications for increasing access to financial services, and partly explains
the persistence of high interest rate spreads in Kenya. While there have been
changes in the nature of the segmentation of the banking sector in Kenya, it
has not been completely eroded.

4.7 Financial access and segmentation

Table 9 shows the usage of different types of banks as reported in the FinAccess
surveys of 2006, 2009 and 2013. It shows that the majority of respondents
use banks in the LPOB segment, followed by the GOB segment. These data
provide corroboration to the discussion above where we showed the increasing
share of the LPOB segment and that this is primarily the result of Equity Bank
pioneering access to a wider market.

Table 9: Financial service use by segment (percentage of adult population)

2006 2009 2013

FOB 2.7 3.5 3.3

GOB 6.2 5.2 4.8

LPOB 6.8 14.3 19.9

of which equity 3.6 -- 16.1

SPOB 0.7 1.6 2.8

Note: This represents the proportion of the adult population reporting that they are currently using a bank in the
segment, it does not take account of multiple account use in the same sector. Respondents may also have an account
in a different sector.
Sources: Authors’ calculations from FinAccess surveys

Table 10 lists the top five banks and highlights changes in outreach between
2006 and 2013. It shows that while the largest increase in outreach can be
attributed to Equity Bank, Co-operative also increasing its outreach. Postbank
lost out to the competition (it do not offer loans) and KCB expanded its
outreach marginally.
 Transformation of Kenya’s Banking Sector, 2000–2012 51

Table 10: Proportion using specific banks46 (percentage of adult population)

2006 2013

Equity 3.6 16.1

Co-operative 3.0 4.7

Postbank 5.6 5.1

KCB 3.3 3.8

Barclays 1.6 1.4

Sources: Authors’ calculations from FinAccess surveys.

Supply-side data also reflect the fact that the increase in access, as discussed
above, has been driven by the LPOBs, one GOB (KCB) and one SPOB (Family
Bank) (see Figure 17). It should be noted that the agency banking model has
been key to allowing banks to increase access to finance. As at December 2012,
there were ten commercial banks that had contracted 16,333 active agents
facilitating over 38 million transactions valued at Ksh195.8 billion (Central
Bank of Kenya, 2012).47
Since these data were collected, the Commercial Bank of Africa (CBA) has
grown considerably in outreach through its M-Shwari product embedded
into M-PESA. Recent data indicate that CBA has some 5.6 million deposit
accounts, compared to Equity Bank’s 7.4 million, with an average account
balance of Ksh16,000 compared to Equity’s average balance of Ksh21,445.
However, CBA’s number of loan accounts (879,000) now exceeds that of
Equity Bank (840,000) (Ngigi, 2014b). Loan sizes are likely to be much lower,
however, given M-Shwari’s loan limit of approximately Ksh8,000, and costs
are high at 7.5% per month. This is revolutionary in the low-end market,
although the actual profile of borrowers remains to be established. However,
CBA’s enforcement mechanisms for these loans are currently weak and it
reported in January 2014 that it had blacklisted 140,000 clients (16%) with
credit bureaux (Ngigi, 2014a).

46 Data for individual banks in the 2009 dataset are not consistent with other years and we therefore do not present
them here. Nevertheless, the data for the segments, which combine a number of banks, appear consistent and have
therefore been presented.
47 The CBK does not provide a breakdown of the number of agents per bank. However, the three banks with the
largest agent networks are Equity Bank and Co-operative Bank (in the LPOB segment) and Kenya Commercial Bank
(in the GOB segment).
52 Kenya’s Financial Transformation in the 21st Century

Figure 17: Growth of deposit accounts by segment

18,000

16,000

14,000
Number of accounts (’000)

12,000
SPOB
10,000
FOB
8,000
GOB
6,000 LPOB
4,000

2,000

0
2006 2008 2010 2012
Source: Central Bank of Kenya supervision reports (various years).

5 Conclusions
This chapter has traced the evolution of the banking sector in Kenya from 2000
to 2012. It shows that at the macro level, there has been significant progress in
terms of increased financial depth, reduced concentration, increased stability
and increased access. However we note three main areas of concern: the
low savings rates, the lack of credit to key sectors of the economy including
agriculture and manufacturing, and the high interest rate spread and margin.
At the micro level, we focus on the evolution of four different segments of
the banking sector – FOBs, GOBs, LPOBs and SPOBs. It had been noted
in 2005 that the first three banks to be established in Kenya (between 1896
and 1910) remained the three dominant banks (Upadhyaya, 2011). Of these
three banks, two were in the FOB segment and one was in the GOB segment.
The analysis shows that there was a significant change in the strength of the
segments between 2005 and 2012. Banks in the LPOB segment gained ground
and managed to overcome the reputation barriers they faced in 2005. This
can be mainly attributed to the phenomenal rise of Equity Bank, but other
banks in the LPOB segment also increased or maintained their share of the
market. This reduction in the historical dominance of the FOBs and GOBs
is the positive story of the banking system in Kenya.
 Transformation of Kenya’s Banking Sector, 2000–2012 53

This change reflects the recognition, led by Equity, of under-banked markets

and that banking these profitably requires new approaches to operating.
Competition for the low-income unbanked is mainly between LPOBs (Equity,
Co-operative), with the mobile-enabled technology of M-PESA now linked
to banking with Commercial Bank of Africa (CBA) via M-Shwari offering
initial signs of a significant shift in the landscape. This competition is likely
to continue to drive growth in the LPOB segment, which should also drive
improvements in efficiency and thus reduce costs to make mass banking
outreach a reality. While disruptive innovation may arise from any quarter
as mobile technology development continues apace, the current trend is
producing a new segmentation between the LPOBs and the formerly dominant
GOBs and FOBs, which appear unable to actively compete for this market,
and raises the risk of the low-income market becoming an effective duopoly
between Equity and CBA.
However, as reflected in the intractable interest rate spread, while segmentation
of the sector has in many ways been eroded, it is still present and there is a need
to increase the reputation of the banking sector as a whole, and in particular
of banks in the SPOB segment, to encourage full competition.

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58 Kenya’s Financial Transformation in the 21st Century

Appendix 1: Main sources of data

Main sources Note Acronym

World Bank Financial Sector Database (2000, updated Data only up to WBFSD
2009 and 2012 and 2013), 2011

World Bank META database (http://data.worldbank.org/ Data up to 2012 WBMETA

country/kenya, downloaded 15 Nov 2012 and 28 May
2014)

Think Business Database TBD

Ashvir banks database ABD

CBK Supervision Reports CBKSV

CBK Statistical Bulletins CBKSTB

KNBS Economic Surveys EcoSurv

CBK and FSK Kenya FinAccess Surveys 2006, 2009, 2013 FinAccess

IMF Financial Access Survey (http://fas.imf.org/) IMFFAS

Indicator Note Exact source

Real GDP growth % WBMETA (row 823 NY.GDP.MKTP.

KD.ZG)

Gross domestic savings % of GDP WBMETA (row 840 NY.GDS.TOTL.ZS)

Gross fixed capital formation (gross % of GDP WBMETA (row 733 NE.GDI.FTOT.ZS)
investment)

Liquid liabilities/GDP % WBFSD (col G – llgdp)

Bank deposits/GDP % WBFSD (col M – bdgdp)

Private sector credit/GDP % WBFSD (col L – pcrdbofgdp)

Net interest margin % WBFSD (col R – netintmargin) 2013

data

Interest rate spread % WBMETA (row 495 FR.INR.LNDP)

Return on assets % WBFSD (col T – roa) 2013 data

Return on equity % WBFSD (col U – roe) 2013 data

Concentration ratios (assets of top 3 % WBFSD (col S – concentration) 2013

banks) data

Total capital/risk-weighted assets (min. 12%) CBKSV for 2000, 2001, 2002, 2004,
2005, 2006, 2007, 2008, 2009, 2011,
2012
 Transformation of Kenya’s Banking Sector, 2000–2012 59

Indicator Note Exact source

Core capital/risk-weighted assets (min. 8%) CBKSV for 2000, 2001, 2002, 2004,
2005, 2006, 2007, 2008, 2009, 2011,
2012

Core capital/total deposits (min. 8%) CBKSV for 2000, 2001, 2002, 2004,
2005, 2006, 2007, 2008, 2009, 2011,
2012

Liquid assets to deposit liabilities (min. 20%) CBKSV for 2000, 2001, 2002, 2004,
(liquidity ratio) 2005, 2006, 2007, 2008, 2009, 2011,
2012

NPLs/total loans CBKSV for 2000, 2001, 2002, 2004,

2005, 2006, 2007, 2008, CBSV(2010)
for 2009, 2010; CBSV(2011) for 2011;
CBSV (2012) for 2012

Agriculture sector % of GDP EcoSurv (2013) for 2012; EcoSurv

(2008) for 2005; EcoSurv (2005) for
2000

Manufacturing sector size % of GDP EcoSurv (2013) for 2012; EcoSurv

(2008) for 2005; EcoSurv (2005) for
2000

Financial sector size % of GDP EcoSurv (2013) for 2012; EcoSurv

(2008) for 2005; EcoSurv (2005) for
2000

Lending to agriculture % (share of CBKSV (2012) for 2012; CBKSTB for

gross loans) 2005; EcoSurv (2005) for 2000

Lending to manufacturing % (share of CBKSV (2012) for 2012; CBKSTB for

gross loans) 2005; EcoSurv (2005) for 2000

Lending to household % (share of CBKSV (2012) for 2012; CBKSTB for

gross loans) 2005; EcoSurv (2005) for 2000

Lending to financial services % (share of CBKSV (2012) for 2012; CBKSTB for
gross loans) 2005; EcoSurv (2005) for 2000

Lending to real estate % (share of CBKSV (2012) for 2012; CBKSTB for
gross loans) 2005; EcoSurv (2005) for 2000

Lending to trade % (share of CBKSV (2012) for 2012; CBKSTB for

gross loans) 2005; EcoSurv (2005) for 2000
60 Kenya’s Financial Transformation in the 21st Century

Appendix 2: List of banks and segments, 2012

Segment No. in segment

Barclays Bank of Kenya FOB 1

Standard Chartered Bank Kenya FOB 2

Citibank N.A. Kenya FOB 3

Bank of Baroda (Kenya) FOB 4

Bank of Africa FOB 5

Bank of India FOB 6

Ecobank FOB 7

Habib A.G. Zurich FOB 8

K-REP Bank FOB 9

Habib Bank FOB 10

UBA Kenya Bank FOB 11

CFC Stanbic Bank FOB 12

Kenya Commercial Bank GOB 1

National Bank of Kenya GOB 2

Consolidated Bank GOB 3

Development Bank of Kenya GOB 4

The Co-operative Bank of Kenya LPOB 1

Equity Bank LPOB 2

Commercial Bank of Africa LPOB 3

NIC Bank LPOB 4

Diamond Trust Bank of Kenya LPOB 5

I&M Bank LPOB 6

Prime Bank SPOB 1

Chase Bank (Kenya) SPOB 2

Family Bank SPOB 3

Imperial Bank SPOB 4

Housing Finance SPOB 5

 Transformation of Kenya’s Banking Sector, 2000–2012 61

Fina Bank SPOB 6

Gulf African Bank SPOB 7

African Banking Corporation SPOB 8

Giro Commercial Bank SPOB 9

Equatorial Commercial Bank SPOB 10

Fidelity Commercial Bank SPOB 11

First Community Bank SPOB 12

Guardian Bank SPOB 13

Victoria Commercial Bank SPOB 14

Trans National Bank SPOB 15

Credit Bank SPOB 16

Oriental Commercial Bank SPOB 17

Paramount Universal Bank SPOB 18

Middle East Bank SPOB 19

Dubai Bank SPOB 20

Jamii Bora Bank SPOB 21

TOTAL INDUSTRY 43

Appendix 3: Changing share of banks in LPOB

segment

Market Share 2005 2012 Difference

Equity Bank 1.90% 9.26% 7.36%

Co-operative Bank of Kenya 8.59% 8.57% -0.02%

NIC Bank 3.43% 4.37% 0.94%

Commercial Bank of Africa 4.90% 4.31% -0.58%

Diamond Trust 2.72% 4.06% 1.34%

I&M Bank 2.99% 3.93% 0.94%

The transformation of financial services in Kenya since 2000 has been
remarkable. Kenya outperforms both the global average and many middle-
income countries such as Chile, Brazil, India, Mexico and Russia, with 75%
of adults holding a formal account that allows them to save, send or receive
money. This book explores the transformation with analysis of a range of
new datasets by leading academic experts. The exceptional growth in mobile
money, the emergence of bank agents, the expansion of bank branches and
the growth of domestically owned banks are just some of the dimensions
investigated in the book. While the Kenyan experience is unique, the story
has great relevance for all emerging economies seeking to develop their
financial systems.

FSD Kenya is an independent trust established to support the

development of inclusive financial markets in Kenya

5th floor, KMA Centre • Junction of Chyulu Road and Mara Road, ISBN 978-9966-093-91-2

Upper Hill • PO Box 11353, 00100 Nairobi, Kenya

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