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A local bank for local value

Interview - July 27, 2012
Gregory Brackenridge, Managing Director of CFC Stanbic Bank, talks to United World about the positive situation Kenya is living today and the bank’s quest to interpose itself “in the lifetime value of our customers”
Focusing on the banking sector, I would like your perception of the challenges to the future growth and development of the sector in Kenya.

I think any discussion around the banking industry needs to be with a background of what Kenya is. The framework for that really is Vision 2030. Vision 2030 seeks to accelerate economic growth with some ambitious targets. You can have a debate around whether those targets are achievable or not. Trying to drive economic growth for a compounded unemployment rate of GDP growth around 10% has not been done sustainably in many places around the world. But I think the important thing is that there is an aspiration and the linkages which are key enablers to those orders of magnitude.

I think the key principles are policy predictability and the enabling role that Government needs to play. That enabling role clearly revolves around the provision of infrastructure principally. Within the ‘infrastructure basket’ is a clear recognition of the role that telecommunications, the Internet and IT will play in the future of any country. In many ways, I think Kenya is a graphic example of a country that is seeking to leapfrog from a technological point of view. I think M-PESA is probably the clearest example of that.
M-PESA is no longer something new – it is a way of life.

Aside from the infrastructure and ICT and Internet connectivity, Kenya is the gateway to east Africa, so all of the service industries that go along with that (ports, roads, railways) drive a diverse economy. A lot of it has links to the agriculture sector. There is a clear recognition that agriculture on its own (while you can get improvements in terms of better productivity, land use, crop selection and production methods) the linkages that agriculture will provide with manufacturing is going to drive those orders of magnitude.

The role of the banking industry against that sort of backdrop means that board-based access to finance is key. So it is not surprising that you have seen banks put M-PESA in as a payment mechanism and they increasingly view it is a utility as opposed to an advantage. They use IT to deliver a relatively low-value ticket items in the SME lending space. Generally, banks recognize that broad-based access to finance is a key driver of economic growth. Our earnings in any given year are largely driven by macroeconomic factors and the external market and so on.

It is no surprise as well that it is not just the existing players that are present. We have seen interest and offices being established by global players. Given the state of the world economy, Africa is the one place that seems to offer the promise of significant growth going forward. It is the emerging market that is expected to be the next locomotive of growth, as Latin America and the Far East have been. But those markets have moved from emerging to becoming developed markets, so there is a significant degree of interest in Africa, not just from global banks (the likes of HSBC etc.) but all of the other large globally significant institutions that one would expect to find. They are all here in one way or another, with the intention of establishing offices, or they are already doing business.

In terms of what is likely to develop, given the size of the projects and financing requirements, today it is quite clear that the entire banking industry would not be able to support financing requirements for those projects. This actually means that unless savings accelerate meaningfully, Vision 2030 will be dependent on external financing to a certain extent, and will continue to be. That is a function of the size of individual institutions in Kenya as well as the total size of the industry. Prudent risk management states that a bank will have a percentage of its capital that it is prepared to risk against projects, so if participation is limited by the size of capital, the total capital base of the country’s banking industry in that sense is not big enough to support the financial plans for this project. So it is a function not just of the rate of savings, but also the absolute size of banks.
I think it makes an interesting mix going forward in terms of different pressures and opportunities in the banking industry.

Clearly Kenya and Nairobi are the banking and finance hub of the region. Can you discuss expansion and specific opportunities?

Kenya is by far the most important and largest part of the East African Community (EAC). The phenomenon that you have here is not just inward investment opportunities, but also the fact that Kenyan corporates are also investing outwards into the region and beyond. So with the likes of some of our competitors, which have expressed their regional expansion strategies and are implementing this (not just in the banking industry but also in manufacturing and distribution and services), investment flows both inwards and outwards. From a banking industry point of view, if we were to have a situation where there was to be a harmonization of regulation, then it would make sense for banks to be regional and to operate on one capital base with one regulator. That would have advantages in the economy in the context of lowering the cost of having geographically fenced pools of capital, which inevitably means that there are elements of capital which are idle.
Therefore you would be able to use your capital better, as well as lower the cost of regulatory compliance. Lowering intermediation costs must be beneficial for the broader economy. The cost of intermediation (in an economic sense) some would argue is a tax on growth. Whatever you can do to lower the cost of intermediation must be ultimately beneficial for the economy.

Is this getting into transfer pricing?

For example in an east African context, if I was to be a regional bank, I need capital in Kenya, Tanzania and Uganda and Rwanda. There is never any one stage in that model where all of your capital will be fully utilized in all of those areas every minute of every day. If I have one capital base, I can manage it much more effectively. Idle capital dilutes returns, so I will seek to enhance my returns by trying to pass the costs of that idle capital onto my customers. That is how businesses work. But to the extent that you actually remove the structural barrier to the efficient use of capital, you will potentially lower the cost of intermediation and the cost at which I have to provide services to customers.

This bank is unique in that it is truly African. Do you feel that is a competitive advantage for you in the market?

I do believe it is. I think global principles will dominate business more and more – there is absolutely no doubt that local nuances, cultural appreciation and understanding add tremendous value. I think we have a different view. I think that ultimately filters upwards as well. We are here for the long haul – we are not going anywhere, as we do not have anywhere else to go. In a sense, it is about having to make it work which ultimately filters through to having a different risk appetite. I am not saying that we would not apply the best international practices to how we actually manage risk, but from a commitment point of view, we can play a transformational role and take our corporate responsibilities seriously. The fact that we have to make it work on the basis that we are not going anywhere else does bring a different level of commitment, particularly when it comes to investment. It is not a question of if the market goes sour, we can close off and go home.

There is still a relatively large informal banking sector here and an unbanked population. How is this bank planning to increase its share in this market as the sector formalizes throughout the country?

Again I think you have to take a view on the development and who is successful and who is not. I think at present, if you had to look at high-volume, low value ticket banking, it almost demands that you have a relatively simple business model in the context of product complexity etc. The more product complexity you have, the more costs you have. So there is a balance and a tipping point where that particular model actually plays out. So where do we see ourselves and where are we benefiting? We do not think we need to compete everywhere as far as that is concerned; we compete selectively and that tends to be around economic zones as opposed to nationally. But nationally we would seek to compete by offering customers in competitive institutions the migration opportunity, hopefully before the existing banker offers it. We are quite focused on not just the entrants into the banking sector, but particular individuals migrating in terms of requirements for additional products.

Today we have a more complex product offering, so we are seeking to bank the higher revenue contributing customer as their need for financial services becomes more complex. We are seeking to interpose ourselves in the lifetime value of our customers.
Kenya is a very interesting market. When you rationalize it, it is not a surprise in the sense of the whole ICT convergence between banking and technology and that whole model is completely relevant to people in their daily lives, in that the ubiquitous ATM does not exist in Kenya. It is very different if you are in a very developed market where there is an ATM and a branch on every corner, where there are other options. It is no surprise that M-PESA is therefore a success. Would M-PESA would be as successful in a market where banking services are available virtually on every street corner? Probably not.

I just saw a report in the UK that money transfer systems are only really coming through now.


You mentioned Vision 2030, which is one of the central themes of our report. What role is the banking sector playing in this?

I do not think that the levels of economic growth that are actually underpinning Vision 2030 are possible without a vibrant banking sector. We need to see an increase in the rate of savings and in order to see this, the banking sector needs to be able to reach more of the population in a more cost effective manner, and then perform its ultimate role, which is to lend. In addition to lending just as debt capital, there is the whole issue of equity of course. The whole development of both equity capital markets and debt capital markets, an increase in savings rates, the lowering of intermediation costs, and the role that banks play are essential to achieving the goals of the Vision 2030. Banks need to be bigger.

What would you tell those who doubt the credentials of this country and the region based on everything they hear in the news, which is unfortunately not the entire reality?

I think the further you are away from something, the more difficult it is to understand. Distance is a factor. I think there is no substitute for actually being there and seeing it. But as far as Kenya and East Africa are concerned for that matter, there is a growing consensus that the growth opportunity is real. Once you have crossed that, then the interest should be much more focused. But as for the perception, one cannot deny what happened post-2007. The unfortunate fact of life is that those events tend to stick out much more than the very peaceful process which gave rise to the new Constitution. The whole referendum, which was a national vote, was actually conducted openly, transparently and effectively and without any violence. But that will largely go unnoticed.

I think the other extremely positive thing that came out of the whole unfortunate episode is that there is absolutely no doubt that the post-election violence of 2007 was a very significant shock to most Kenyans. Many people never believed that something like that could happen and I think there is an absolute determination that it should never happen again. I think people need to be able to understand things that make rational sense as opposed to the emotional things I have been talking about. If you said that the economic growth opportunity is real and is happening and there are people who are taking advantage of it, not just like ourselves, but companies like General Electric which has set up an office in Nairobi, I do not think they did that by accident. Similarly, IBM. You can name a number of other large global companies.

But the other tangible factor that came out of it was the reality of coalition politics. I think there is a clear recognition by all of the serious players in the political sphere that the ability of any single party to cross the line in a winner-takes-all scenario is unlikely. The Government is actually a manifestation of the reality of what I call coalition politics.

There is no doubt that the country is already in election-mode, if you look at the political negotiations that are going on behind the scenes. For me, there is a manifestation that the serious players understand that coalition politics is the reality of Kenyan politics.