Kenya is rich in type, number and sophistication of financial institutions. The financial system consists of 42 commercial banks with over a thousand branches countrywide, a diversified system of non-bank financial institutions consisting of 176 Deposit-Taking SACCOs and 181 Non-Withdrawable Deposit-Taking SACCOs, 58 insurance companies, a number of hire purchase companies, a post office savings bank with a countrywide branch network, a number of development finance companies, a stock exchange and over 100 exchange bureaus.
Commercial banks are the most dominant deposit-taking institutions in the country’s financial system. They dominate the business of mobilising domestic financial savings which they on-lend to various productive economic activities.
The origins of commercial banking in Kenya lie in the commercial connections between India and the East African region which existed towards the close of the 19th century. It was the National Bank of India that pioneered in Kenya in 1896 after the establishment of British presence in the area. It was followed by the Standard Bank of South Africa in 1910 and the National Bank of South Africa in 1916. This bank was amalgamated with the Colonial Bank and the Anglo-Egyptian Bank Limited in 1926 to form Barclays (Dominion, Colonial and Overseas).
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In spite of their names, two of the above banks were branches of British banks based in London, UK. Their establishment in Kenya was in line with the practice of British banks to follow the development of trade in the colonies and concentrate on the finance of international trade. The National Bank of India, which later became the National and Grindlays Bank, operated mainly in India, while the Standard Bank of South Africa, which later became the Standard Bank, had established itself in a thriving business in South Africa. The National Bank of South Africa was also active in that colony.
These banks were vital links with Europe, South Africa and Indian business. The effects of their operations opened new opportunities for the traders and settlers who had come to Kenya. This growing community provided initial sources of deposits for the banks not only with funds which they had brought with them but also in the profits from the country’s growing trade in primary commodities.
The banks were largely left to run their business according to dictates of external conditions. The outstanding characteristic of this phase of their development was that they soon became able to collect deposits locally in excess of what they reckoned they were able to utilise in Kenya, and these surplus funds were invested in London. This was partly because there were few investment opportunities in the economy and partly because there was a communication gap between the bankers and the prospective borrowers.
The result was that, for a long period of their history, these banks were actually involved in a process of exporting capital from Kenya, which is an underdeveloped country, for use in a developed country. Even so, the domination of the local banking system by the supra-territorial commercial banks based upon London using the London money market was directly reflected in the Kenyan economy.
The developing economy, with excellent opportunities for further expansion, attracted an influx of new banks into Kenya after half a century of banking monopoly. These were the Nederlandsche Handel-Maatschappij, a Dutch bank incorporated in the Netherlands and now renamed the Algemene Bank Nederland, N.V. (General Bank of the Netherlands) 1951; the Bank of India and the Bank of Baroda in 1953 and the Habib Bank (Overseas) Limited in 1956. The Ottoman Bank, as well as the Commercial Bank of Africa, were established in 1958.
In the late 1960s, banking in Kenya experienced a new surge of energy, change and activity. In January, 1968, the Co-operative Bank of Kenya (Co-op Bank) opened its doors to provide a specialised banking service for members of the growing co-operative movement. Another bank, then wholly-owned by the government of Kenya, the National Bank of Kenya, was established in June 1968.
In March 1969, the business of the Ottoman Bank was taken over by the National and Grindlays Bank. The National and Grindlays Bank, in turn, ceased operating in 1971. Its business was split, commercial banking coming under the new Kenya Commercial Bank, the famous KCB now. The government owned 60 per cent of the bank at that time, but now it has a 19.76% shareholding.
The merchant banking division of the National and Grindlays was incorporated in a new bank, Grindlays Bank International (Kenya) Ltd, which was 40% government-owned.
In 1971, Barclays Bank Dominion, Colonial and Overseas changed its name to Barclays Bank International Ltd before rebranding to the Absa Bank Kenya PLC it is today.
In 1974, two American banks were established in Kenya: the First National City Bank of New York, now Citibank, and the First National Bank of Chicago, which later became part of JPMorgan Chase, the fifth-largest bank in the world. Today, of the 42 active commercial banks in Kenya, 15 are foreign-owned, and these banks collectively account for more than 75% of total deposits in the country, according to the latest data from the Central Bank and the Kenya National Bureau of Statistics (KNBS).
For a country at its stage of development, Kenya has a fairly advanced banking system. It has about 30 banking offices per million people, and their behaviour indicates that the financial assets of the private sector are concentrated in deposit-type assets. Currency in circulation comprises only about 33% of the money stock, a lower proportion than in many developing countries.
The early banks were regulated by the Banking Ordinance of 1910. The Act was later repealed by the Banking Ordinance of 1956. The new Act sought to ensure that only banks with adequate capital and financial stability would be permitted to operate in the country. Until 1985, the banks were regulated under the Banking Act 1968. This Act was amended and subsequently replaced with the Banking Act 1989.
At present, the Central Bank of Kenya is in various ways guided by the following pieces of legislation to regulate the banks: the Constitution of Kenya 2010 in general, the Central Bank of Kenya Act (2015), Banking Act (2015), Microfinance Act (2006), the National Payment System Act (2011) and the Kenya Deposit Insurance Act 2012.
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