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Banks reaping big dividends of digital investments, says report

By Zachary Ochuodho
Tuesday, April 21st, 2020
Central Bank of Kenya. Photo/PD/File
In summary
    • Bank branches are running on the concept of 24 hours every day, made possible by the use of tele-banking, ATMs, internet banking, mobile banking and e-banking.
    • These technology-driven delivery channels are being used to reach out to maximum number of customers at lower cost and in most efficient manner.
    • The beauty of these banking innovations is that they put both banker and customer in a win- win situation. Effective use of technology has a multiplier effect on growth and development.
    • Commercial banks see building strong digital foundations as critical to their long-term success in harnessing the potential of the digital economy as a driver of growth and service delivery.

Zachary Ochuodho @zachuodho

Kenya’s banking sector has started reaping big from investments made in information technology in the recent past, a new financial report indicates.

It says banks’ innovation have seen growth on the non-funded income (NFI) to funded segments increase to 63:37 compared to 67:33 recorded in a similar period in 2018.

Commercial banks have been riding on the digital revolution wave to improve their operational efficiency. 

The increased adoption of alternative channels of transactions such as mobile, internet and agency banking, has led to increased transactions carried out via alternative channels and out of bank branches, which have been reduced to handling high-value transactions and other services such as advisory.

According the report, the banking sector showed improved performance, evidenced by the 17.4 per cent growth in the non-funded income in the period which ended December 30, 2019, from 3.8 per cent growth in the previous year.

“The growth in NFI was attributable to the growth in fees and commissions which recorded an 18.4 per cent growth in 2019,” the study done by Cytonn Investment Management indicates.

Rodney Omukhulu, Assistant Investment Analyst at Cytonn Investments, said the commercial banks have been engaging in innovation but it became more critical, especially after the law capping interest rate was enacted.

“We expect banks to refocus on lending once they recalibrate their models to adjust for new loan pricing, therefore, increasing the Loan to Deposit Ratio,” he said. 

Omukhulu said with the loosening of the regulations, particularly the repeal of the interest rate cap, the sector can now focus on core operations; adopt technology, expansion and further consolidation, revenue diversification to increase growth and profitability.

“Co-operative Bank’s “Soaring Eagle Initiative” enables both channel diversification through internet banking, Mco-op cash, and merchant banking among others, as well as consultancy and capacity building,” Omukhulu said.

He said with the Microfinance Bill 2019 of increasing the minimum on core capital requirements still in its pilot stage, more mergers and acquisitions, would enable the unprofitable and/or smaller banks to manage the requirement and be able to increase profitability through cost efficiency and deposits growth.

Head of Research at AIB Capital Ltd Sarah Wanga said with the repeal of the interest rate cap, banks can now price loans based on customers’ risk profiles, banks and will, therefore, be able to increase interest rates with bias to credit risk rating of borrowers, which will, in turn, improve their interest income.

She said she expects banks to refocus on lending with many of them looking to target select segments such as corporate entities and small and medium enterprises (SMEs).

Wanga said NFI growth outperformed that of interest income, thereby allowing the banks to remain profitable amid a rigid regulatory environment.

Commercial banks have been riding on the digital revolution wave to improve their operational efficiency. 

The increased adoption of alternative channels of transactions has so far, KCB Bank deploy its digital customer service platform as part of its digital transformation efforts. 

Aside from improved customer experience, the platforms will be able to collect real-time data on customers, then analyse and use it to make educated decisions on how to improve operations on an ongoing basis.

Co-operative Bank of Kenya has also launched Co-op Bank Property Hub under its mortgage division, which will offer property sales and mortgage origination to its clients.

The bank also plans to grow the business of its leasing-focused subsidiary Co-op Bank Fleet.

Diamond Trust Bank Kenya has partnered with SWIFT, a leading provider of secure financial messaging services, to provide real-time cross border payments to its clients. 

Innovation hub

Standard Chartered Bank Kenya has also launched an innovation hub lab in Nairobi dubbed Xcelerator in a bid to boost its revenue streams and diversify by riding on financial technology.

John Kirimi, Sterling Capital Ltd director said commercial banks in Kenya are changing into a one-stop supermarket – where nearly what is required is done under the same roof. 

“The focus is shifting from mass banking to class banking with the introduction of value-added and customised products,” he said. 

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