According to industry experts, the banking system in Kenya is congested. According to the Oxford Business Group, in 2015, with a population of 43 Million people, Kenya had 43 banks and over 180 SACCOs (Savings and credit cooperative societies) and MFIs (Micro-Finance Institutions).
In the last two years, three banks were placed under receivership after it became apparent they could no longer operate due to having minimum liquidity ratios. Two of those banks were classified in tier 3. The closure of these banks left many customers concerned about their money. There were numerous speculations as to what happened as well as which bank would be next.
The closure of these banks left many customers deeply concerned about their money. There were numerous speculations as to what happened as well as which bank would be next.
Many people assumed that the problem was the position of the banks in the tier system. This led them to hurriedly withdraw their money and assets from the ‘unstable banks’ into what they thought would be more ‘stable banks’ in higher tiers.
This, therefore, brought up the question, does the position of a bank in the tier system have any effect on its success? In order to answer this, let us break down the tier system.
The Tier System of Classification
The Central Bank of Kenya (CBK) has grouped the banks in Kenya into three tiers. The CBK came up with this classification system as a means of distinguishing different banks according to their market share, asset base and number of customer deposits.
Tier 1 comprises of large banks with hundreds of billions in cumulative assets and millions of depositors. These banks asset bases are so deep that any failures would have a catastrophic effect on our economy as a country.
In the event that would happen, the government would have to intervene to avert a financial crisis. The six banks in this tier control 49.9% of the market. They are as follows:
- Co-operative Bank of Kenya
- Kenya Commercial Bank(KCB)
- Equity Bank
- Barclays Bank
- Commercial Bank of Africa(CBA)
- Standard Chartered Bank
Tier 2 banks are medium-sized lenders. They control 41.7% of the market share. They are:
- Family Bank
- I&M Bank
- NIC Bank
- Diamond Trust Bank
- Bank of Africa
- Housing Finance
- Prime Bank
- Bank of Baroda
- CFC Stanbic Bank
- Guaranty Trust Bank
- National Bank
- Bank of India
The final level is Tier 3. They control 8.4% of the market. They are:
- Jamii Bora Bank
- ABC Bank
- Credit Bank
- Paramount Universal
- Consolidated and Development Bank
- Fidelity Bank
- Equatorial Commercial Bank
- Giro Bank
- Guardian Bank
- Middle East Bank
- Oriental Commercial Bank
- Paramount Universal Bank
- Trans-National Bank
- Victoria Bank
- First Community Bank
- Habib A.G Zurich Bank
- Habib Bank
- Gulf Africa
- Sidian Bank
- UBA Bank
- Consolidated Bank
- Development Bank
In 2015, CFC Stanbic was replaced by CBA Bank in tier 1 after losing top-tier classification due to a drop in its market share. The shifts in market share are caused by the increase in client deposits as banks implement various strategies to increase deposits.
In 2015, tier 2 banks posted stronger results in terms of growth. Most of the banks in this tier recorded increases in their asset base as well as their customer deposits.
However, the tier 1 banks experienced the opposite with most of their customer deposits dropping marginally. For tier 1 banks, their share of industry assets also suffered a significant drop.
In the same way, tier 3 banks also experienced drops in customer deposits and thus significant drops in their asset bases. This was attributed to the fact that many people speculated more banks in tier 3 would fail.
The Central Bank of Kenya has continued to impose strict regulatory measures to prevent other banks from going under. It was determined that most of the reasons that led to the fall of the three banks was due to mismanagement and fraudulent behavior, therefore ruling out their position in the classification system.
This has led to a sense of calm around the public especially when it comes to trusting their banks. Therefore, understanding that the tier classification is not a cause for failure but just a distinguishing principle.