Doctor of philosophy in commerce: Department of commerce and financial studies school of economics and commerce Bharathidasan university Tiruchirappalli-620 024 Tamil Nadu, India

Technical Efficiency of Kenyan Banks- A Data
Envelopment Analysis

Thesis submitted to the

BHARATHIDASAN UNIVERSITY, TIRUCHIRAPPALLI
for the Award of the Degree of

DOCTOR OF PHILOSOPHY IN COMMERCE

By
ISAIAH ONSARIGO MIENCHA

Research Supervisor and Convener

Dr. M.SELVAM,
Professor and Head

DEPARTMENT OF COMMERCE AND FINANCIAL STUDIES

School of Economics and Commerce
BHARATHIDASAN UNIVERSITY
TIRUCHIRAPPALLI-620 024
TAMIL NADU, INDIA

AUGUST 2015


DEPARTMENT OF COMMERCE AND FINANCIAL STUDIES
School of Economics and Commerce
BHARATHIDASAN UNIVERSITY

TIRUCHIRAPPALLI – 620 024, TAMIL NADU, INDIA
______________________________________________________________________
Prof. M. SELVAM, M.Com., MBA., MADE., Ph.D
Professor and Head
Email ID:

Date:

CERTIFICATE
The thesis entitled, TECHNICAL EFFICIENCY OF KENYAN
BANKS - A DATA ENVELOPMENT ANALYSIS, is a bona fide record of
research work done for the award of Doctor of Philosophy in Commerce by
Mr. ISAIAH ONSARIGO MIENCHA, Research Scholar (Full Time),
Department of Commerce and Financial Studies, Bharathidasan University,
Tiruchirappalli, Tamil Nadu, India. It is the original work of the candidate and it
has not previously formed the basis for the award of any Degree, Diploma,
Associateship, Fellowship or other similar titles. The thesis represents
independent work on the part of the candidate.

SIGNATURE OF THE RESEARCH ADVISOR
AND CONVENER

i


ISAIAH ONSARIGO MIENCHA
Ph.D Research Scholar (Full Time)
Department of Commerce and Financial Studies
Bharathidasan University
Tiruchirappalli – 620 024

Tamil Nadu, India
______________________________________________________________________

Date:

DECLARATION
I hereby declare that the thesis entitled, TECHNICAL EFFICIENCY
OF KENYAN BANKS - A DATA ENVELOPMENT ANALYSIS, embodies
the result of my research work carried out under the guidance and supervision of
Professor M.SELVAM, Research Advisor and that I have not submitted the
above thesis to any University for any Degree, Diploma, Associateship,
Fellowship or other similar titles previously.

(ISAIAH ONSARIGO MIENCHA)

ii


ACKNOWLEDGEMENT
First, let me take this opportunity to thank God for everything that I have got in
my life, without which I would have been nothing.
The individual to whom I owe the greatest debt for making this thesis possible is
my research supervisor Prof. M. Selvam Professor and Head, Department of
Commerce and Financial Studies, Bharathidasan University, Tiruchirappalli for his
inspiring guidance. He was the person who read every word in every draft, a task he
volunteered with unflagging good cheer and enthusiasm and rearranged the text to
create a more focused and usable document and invariably had excellent suggestions
for improving the flow of ideas and sharpening throughout my work. During this
tenure, I always admired his incessant guidance, thought provoking ideas, valuable
advice and constant encouragement towards my doctoral work.

I avail this opportunity with great pleasure to ensure my unfathomable gratitude
and whole hearted thanks to my great Teachers, Dr. M. Babu, Dr. S. Vanitha and
Dr. J. Gayathri, Assistant Professors, Department of Commerce and Financial Studies,
Bharathidasan University, Tiruchirappalli for their support throughout my tenure of
my research. I am thankful to them for all the motivation, encouragement and valuable
suggestions that they have given me.
I am extremely indebted to my Doctoral Committee Members, Dr. Joseph
Anbarasu, Associate Professor in Commerce, Bishop Heber College, Tiruchirappalli
and Dr. S. Sekar, Principal, Urumu Dhanalakshmi College for their valuable
suggestions and constant inspiration which instilled in me an unquenchable thirst to my
research work.
I wish to record my sincere thanks to The Honourable Vice Chancellor, The
Registrar, The Controller of Examinations, The Finance Officer and the entire
Administration of Bharathidasan University, Tiruchirappalli for giving me the
opportunity to do my doctoral work.

iii


I would like to thank my seniors, Dr. M. Raja, Dr. G. Indhumathi,
Dr. P. Bhuvaneswari, Dr. WRPK. Fernando, Dr. A. Jeyachitra, Dr. P. Nageswari,
Dr. E. Bennet, Dr. R. Rajesh Ramkumar, Dr. V. Karpagam and fellow Research
Scholars, Ms. M. Gayathri, Mr. V. Vasanth, Mr. K. Lingaraja , Ms. P. Amrutha,
Ms. S. Amridha Vasani, Mrs. S. Vetrichelvi and Mr. Marxia Oli Sigo, Department of
Commerce and Financial Studies, Bharathidasan University, Tiruchirappalli for their
contribution to the completion of this thesis.
I would also like to thank Mr. J. Arokiam, Mr. R. Velmurugan,
Mrs. D. Shanthi Manjula and Mrs. P. Meena for their support and help.
I am very much thankful to the Department Library, Department of Commerce
and Financial Studies, Librarian, and other staff members of Central Library,

Informatics Centre, Bharathidasan University, for giving me necessary reference
materials and enabling me to successfully complete this thesis.
My heartfelt gratitude to Prof. Mohan Gnana Olivu, Academic Director, Annai
College, Kumbakonam, who helped me in shaping all my articles and my thesis work.
Last, but certainly not the least, I must acknowledge, with deep thanks, the
support from my family members and my dearest friends. I thank my grandparents
Mr. Gesicho Nyandumo (late) and Mrs. Gechemba (late) who showered affection,
love and care on me. I thank my father and mother, Mr. Charles Minyencha Gesicho,
Mrs. Rebeccah Moraa and Mrs. Bethsheba Moraa for striving hard to provide a
good education for me. They have instilled many admirable qualities in me and given
me a good foundation to face life with confidence. They have taught me about hard
work, self-respect, persistence, perseverance and they have set an example to be
independent, Dad, especially, remained a great role model of resilience, strength and
character. They have always expressed how proud they are of me and how much they
love me. I am proud of them and love them very much. I must thank my uncles
Mr. Hezron Mageto (late), Mr. David Mageto (late), Mr.

Zechariah Mageto,

Mr. Moses Gesicho (late), Mr. Samwel Gesicho (late), Mr. Timothy Gesicho and
Mr.

Sanduki Gesicho (late), aunties Mrs.

Elzabeth, Mrs.

Jane Mosiori and

Mrs. Martha David for their invaluable love and affection. I wish to thank my
iv

Brother-in-Laws Mr.

Peter King’oina, Mr.

Gerald Matara and Mr.

Zablon

Onyambu. For their encouragement and support throughout my studies. I also thank
my beloved sisters Mrs. Teresa Stephen, Mrs. Zipporah Monyenche, Mrs. Alice
Bitutu, Mrs.
Mrs.

Mercy Moragwa, Mrs.

Gladys Nyabonyi, Mrs.

Florence Kemunto, Mrs.

Jane Nyaboke,

Lilian and Mrs. Linet my lovable brothers,

Mr. Stephen Miencha (Late), Mr. Joshua Morang’a, Mr. Henry, Mr. Richard
Oigoro, Mr. Peter Nyareru and (Dr.) Haron Miencha, nephew Erick Mose and
Moses Gwaro for their love and support.

I always fall short of words and felt

impossible to describe their support in words and I am grateful for them who made my
life enjoyable one.

ISAIAH ONSARIGO MIENCHA
Date:

v


This Thesis is dedicated to
my Brother Stephen Miencha (late)
who is missed deeply and my parents who had
a never-ending thirst for learning and
imbued the same passion in me.

vi


LIST OF ABBREVIATIONS
AGM

Annual General Meeting

BCC

Bankers, Charnes and Coopers

CAMEL

Capital, Asset, Earnings, Management, Earnings, Liquidity

CBK

Central Bank of Kenya

CCR

Charnes, Cooper and Rhodes

CEO

Chief Executive Officer

CMA

Capital Markets Authority

CO-PRV

Co-operative Bank of Kenya

CRS

Constant Return to Scale

DEA

Development Envelope Analysis

DEAOS

Data Envelopment Analysis Online Software

DMU

Decision Making Units

DPFB

Deposit Protection Fund Board

FOB

Foreign Owned Bank(s)

GOB

Government Owned Bank(s)

GoK

Government of Kenya

IFEM

Interbank Foreign Exchange Market

I&M

Industrial and Mortgage

IPO

Initial Public Offering

KCB

Kenya Commercial Bank

KShs.

Kenya Shillings

Max

Maximum

Min

Minimum

NBFIs

Non-Bank Financial Institution (s)

NIDBK

National Industrial Development Bank of Kenya

NH

Null Hypothesis

NPL

Non-Performing Loans

NSE

Nairobi Stock Exchange

OECD

Organization for Economic Co-operation and Development

OMO

Open Market Operation
vii


ROA

Return on Assets

ROE

Return on Equity

Sig

Significant

SME

Small and Medium sized enterprise

SPSS

Statistical Packages for Social Science

STD

Standard Deviation

T.A

Total Assets

T.E

Technical Efficiency

USD

United States Dollar

VRS

Variable Return to Scale

WWW

World Wide Web

viii


CONTENTS

Chapter

Page No.

Description
Acknowledgement

iii

List of Abbreviations

vii

List of Tables

x

List of Charts

xiii

I

Introduction

1

II

Review of Literature and Research Design

19

III

Nature of Variables of Kenyan Sample Banks Using
Descriptive Analysis

44

IV

Relationship Between Kenyan Sample Banks Using
Correlation Analysis

99

V

Technical Efficiency of Kenyan Sample Banks Using
Data Envelopment Analysis

128

VI

Summary
of
Conclusion

183

Findings,

Suggestions

and

Bibliography

191

Annexure –I- Important terms used

198

Annexure – II – Publications by the Researcher

199

ix


LIST OF TABLES
Table
No.

Particulars

Page
No.

1.1

Monetization, Assets and Deposits held by Banks in East Africa from 1950
to 1963

5

1.2

Foreign Banks Operating in Kenya before and after Independence till date

5

1.3

Domestic and Foreign Banks Operating in Kenya before and after
Independence

6

1.4

Numbers of Financial Institutions in Kenya during the period from 1963 to
2012

9

1.5

List of Failures Banks and NBFIs in Kenya during 1984 – 2005

10

1.6

Regulatory Capital Ratios of Banks in Kenya

11

1.7

Deposit Insurance Schemes in Kenya

13

1.8

List of Organized Kenyan Commercial Banking Sector as on 31st
December 2013

17

2.1

Details of Sample Banks

37

3.1

Descriptive Statistics of Deposits for Large (Top and Lower) size Kenyan
Commercial Banks

46

3.2

Descriptive Statistics of Deposits for Medium (Top and Lower) size
Kenyan Commercial Banks

51

3.3

Descriptive Statistics of Deposits for Small (Top and Lower) size Kenyan
Commercial Banks

55

3.4

Descriptive Statistics of Total Assets for Large (Top and Lower) size
Kenyan Commercial Banks

59

3.5

Descriptive Statistics of Total Assets for Medium (Top and Lower) size
Kenyan Commercial Banks

63

3.6

Descriptive Statistics of Total Assets for Small (Top and Lower) size
Kenyan Commercial Banks

67

3.7

Descriptive Statistics of Return on Assets (ROA) for Large (Top and
Lower) size Kenyan Commercial Banks

71

3.8

Descriptive Statistics of Return on Assets (ROA) for Medium (Top and
Lower) size Kenyan Commercial Banks

75

3.9

Descriptive Statistics of Return on Assets (ROA) for Small (Top and
Lower) size Kenyan Commercial Banks

79

x


3.10

Descriptive Statistics of Return on Equity (ROE) for Large (Top and
Lower) size Kenyan Commercial Banks

83

3.11

Descriptive Statistics of Return on Equity (ROE) for Medium (Top and
Lower) size Kenyan Commercial Banks.

87

3.12

Descriptive Statistics of Return on Equity (ROE) for Small (Top and
Lower) size Kenyan Commercial Banks

91

3.13

Descriptive Statistics of Deposits, Total Assets, Return on Assets and
Return on Equity in respect of Large, Medium and Small (Top and Lower)
Size Kenyan Commercial Banks

95 96

4.1

The Result of Correlation of DEPOSITS for (Top and Lower) Kenyan
Commercial Sample Banks under Large group

101

4.2

The Result of Correlation of DEPOSITS for (Top and Lower) Kenyan
Commercial Sample Banks under Medium group

104

4.3

The Result of Correlation of DEPOSITS for (Top and Lower) Kenyan
Commercial Sample Banks under Small group

106

4.4

The Result of Correlation of TOTAL ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Large group

108

4.5

The Result of Correlation of TOTAL ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Medium group

110

4.6

The Result of Correlation of TOTAL ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Small group

112

4.7

The Result of Correlation of RETURN ON ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Large group

114

4.8

The Result of Correlation of RETURN ON ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Medium group

116

4.9

The Result of Correlation of RETURN ON ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Small group

118

4.10

The Result of Correlation of RETURN ON EQUITY for (Top and Lower)
Kenyan Commercial Sample Banks under Large group

120

4.11

The Result of Correlation of RETURN ON ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Medium group

122

4.12

The Result of Correlation of RETURN ON ASSETS for (Top and Lower)
Kenyan Commercial Sample Banks under Small group

124

4.13

The Result of Consolidated Correlation Significance of Deposits, Total
Assets, Return on Assets and Return on Equity for Large, Medium and
Small (top and lower) Size Kenyan Commercial Banks

126

xi


5.1

Results of Technical Efficiency of Deposits (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in the Large group) during the study period 2004 - 2013

130

5.2

Results of Technical Efficiency of Deposits (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in the Medium groups) during the study period 2004 - 2013

135

5.3

Results of Technical Efficiency Deposits (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in Small group) during the study period 2004 - 2013

139

5.4

Results of Technical Efficiency Total Assets (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in the Large group) during the study period 2004 - 2013

143

5.5

Results of Technical Efficiency Total Assets (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in the Medium group) during the study period 2004 - 2013

147

5.6

Results of Technical Efficiency Total Assets (using CCR, BCC and T.E
Models) for Kenyan Commercial Banks (three Top and three Lower banks
in the Small group) during the study period 2004 - 2013

151

5.7

Results of Technical Efficiency Return on Assets (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Large group) during the study period 2004 - 2013

155

5.8

Results of Technical Efficiency Return on Assets (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Medium group) during the study period 2004 - 2013

159

5.9

Results of Technical Efficiency Return on Assets (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Small group) during the study period 2004 - 2013

163

5.10

Results of Technical Efficiency Return on Equity (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Large group) during the study period 2004 - 2013

167

5.11

Results of Technical Efficiency Return on Equity (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Medium group) during the study period 2004 - 2013

172

5.12

Results of Technical Efficiency Return on Equity (using CCR, BCC and
T.E Models) for Kenyan Commercial Banks (three Top and three Lower
banks in the Small group) during the study period 2004 - 2013

176

5.13

Comparison of Technical Efficiency of Kenyan Sample Size Banks During

the Study Period from 2004 to 2013

180181

xii


LIST OF CHARTS
Chart
No.

Particulars

Page
No.

1.1

Structure of Kenyan Banking Sector

16

3.1

The Results of DEPOSITS for Kenyan Commercial Sample (LargeTop and Lower) Banks

49

3.2

The Results of DEPOSITS for Kenyan Commercial Sample
(Medium – Top and Lower) Banks

53

3.3

The Results of DEPOSITS for Kenyan Commercial Sample (Small
– Top and Lower) Banks

57

3.4

The Results of TOTAL ASSETS for Kenyan Commercial Sample
(Large – Top and Lower) Banks

61

3.5

The Results of TOTAL ASSETS for Kenyan Commercial Sample
(Medium – Top and Lower) Banks

65

3.6

The Results of TOTAL ASSETS for Kenyan Commercial Sample
(Small – Top and Lower) Banks

69

3.7

The Results of RETURN ON ASSETS for Kenyan Commercial
Sample (Large – Top and Lower) Banks

73

3.8

The Results of RETURN ON ASSETS for Kenyan Commercial
Sample (Medium – Top and Lower) Banks

77

3.9

The Results of RETURN ON ASSETS for Kenyan Commercial
Sample (Small – Top and Lower) Banks

81

3.10

The Results of RETURN ON EQUITY for Kenyan Commercial
Sample (Large – Top and Lower) Banks

85

3.11

The Results of RETURN ON EQUITY for Kenyan Commercial
Sample (Medium – Top and Lower) Banks

89

3.12

The Results of RETURN ON EQUITY for Kenyan Commercial
Sample (Small – Top and Lower) Banks

93

5.1

Technical Efficiency of DEPOSITS (Top and Lower) for Kenyan
Commercial Banks under Large group during the study period
(2004 to 2013)

133

5.2

Technical Efficiency of DEPOSITS (Top and Lower) for Kenyan
Commercial Banks under Medium group during the study period
(2004 to 2013)

137

xiii


5.3

Technical Efficiency of DEPOSITS (Top and Lower) for Kenyan
Commercial Banks under Small group during the study period
(2004 to 2013)

141

5.4

Technical Efficiency of TOTAL ASSETS (Top and Lower) for
Kenyan Commercial Banks under Large group during the study
period (2004 to 2013)

145

5.5

Technical Efficiency of TOTAL ASSETS (Top and Lower) for
Kenyan Commercial Banks under Medium group during the study
period (2004 to 2013)

149

5.6

Technical Efficiency of RETURN ON ASSETS (Top and Lower)
for Kenyan Commercial Banks under Small group during the study
period (2004 to 2013)

153

5.7

Technical Efficiency of RETURN ON ASSETS (Top and Lower)
for Kenyan Commercial Banks under Large group during the study
period (2004 to 2013)

157

5.8

Technical Efficiency of RETURN ON ASSETS (Top and Lower)
for Kenyan Commercial Banks under Medium group during the
study period (2004 to 2013)

161

5.9

Technical Efficiency of RETURN ON ASSETS (Top and Lower)
for Kenyan Commercial Banks under Small group during the study
period (2004 to 2013)

165

5.10

Technical Efficiency of RETURN ON EQUITY (Top and Lower)
for Kenyan Commercial Banks under Large group during the study
period (2004 to 2013)

170

5.11

Technical Efficiency of RETURN ON EQUITY (Top and Lower)
for Kenyan Commercial Banks under Medium group during the
study period (2004 to 2013)

174

5.12

Technical Efficiency of RETURN ON EQUITY (Top and Lower)
for Kenyan Commercial Banks under Small group during the study
period (2004 to 2013)

178

xiv


Chapter I
Introduction

1.1

INTRODUCTION
The financial systems in Africa in general and Kenya specifically, are both

shallow and fragile and therefore, cannot fulfill the real economic growth and poverty
eradication (Nissanke and Stein, 2003). The shallowness and fragility are reflected in
low lending levels, high interest rate spreads, high levels of nonperforming loans and
several bank failures. The financial institutions, particularly Commercial Banks, play a
vital role in the economy of a developing nation (King and Levine, 1993). As one of
the faster- growing economies in the world, Kenya experiences a slight increase in the
expectations of the business partners. The competitive service quality is important for
survival and existence of any banking institution in the cut-throat competition. The
banking sector in Kenya faced serious functional problems during the past few decades.
Commercial Banks have been undergoing tremendous technological and managerial
changes due to the globalization and dynamic environment. Though the financial
system in Kenya had an advantage in operating in closed and regulated environment, it
went through a sea change during the nineties.
The Central Bank of Kenya (CBK), besides initiating many reforms such as deregulation, use of technology, de-licensing etc, created five banks on a national basis
(National Banks) with a network throughout the country. Besides, the computerization
in the banking operations got stepped up in Kenya. Foreign Banks operating in Kenya
were subjected to the same requirements as applicable to domestic banks. These
reforms created competitiveness and immense pressure in the Kenyan banking industry
and it triggered greater use of information technology, consumer credit, more
transparent balance sheet and product diversification. The other reform was to reduce
the number of banks in the system, consolidation imperative and introduce supportive
measures of the banks. The reforms have also raised concerns about the performance of
Kenyan banking system, especially due to the Non-Performing Assets (NPAs). In the
current competitive atmosphere, the commercial banks are under pressure to make

credit more affordable and expand their lending portfolio to reverse the slowdown and
spur the growth. It is greatly emphasized that the effectiveness of financial institution is
to be measured in terms of efficiency and competitive edge over others. Therefore, an
analysis of banks’ efficiency is crucial to the markets, the Government and the society
at large. The commercial banks are constantly trying to reach international benchmarks,
with their best practices. Some research studies reported that the Private Banks in
1


Kenya also performed well, with better liquidity assets, compared to Public Banks and
Foreign Banks. The study by Miencha, Murugesan, Rajesh and Karpagam (2013),
found that the relative average efficiency score, for all sample banks, over the years
was fair.
1.2

Production and Technical Efficiency
The production of banks is an act of transforming inputs into outputs. The

objective of production is to create value through transformation and the outputs are
given in general desirable outcomes. Hence more output is better. At the same time,
inputs are valuable resources, with alternative uses. Unspent quality of any input can be
used for producing more of the same outputs or produce different outputs. The main
objectives of efficient resource utilization by banks are;
a) To produce as much output as possible from a specific quantity of inputs.
b) To produce a specific quantity of outputs using less inputs without affecting
quality.
An input-output combination is a feasible production plan if the output quantity
can be produced from the associated input quantity. The technology available to a firm
at a given point in time defines which input-output combinations are feasible. Two
concepts commonly characterize a firm’s resource utilization performance and they are;

a) Productivity
b) Efficiency.
1.3

Development of Banking System in Kenya - Historical Overview Banking
in Colonial Kenya (1896 to 1950)
The establishment of the British Empire in East Africa began with the

establishment of a trading frontier under the agency of Imperial British East Africa
Company (IBEAC), incorporated in United Kingdom in 1888. IBEAC sought to inherit
the centuries old long-distance trade that linked the African interior to the African
coast, and from the African Coast to the Indian sub-continent through 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 (Mangat, 1968
and Seidenberg, 1996).

2


The origins of commercial banking in Kenya lay 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 later it became Standard Bank. The National Bank of South
Africa was established in 1916 but was later merged with the Colonial Bank and
Anglo-Egyptian Bank formed the Barclays Bank (Dominion, Colonial and Overseas) in
1926 which was also based in London (Atieno Odhiambo et al 2000).
The most important point is that while commercial banks were relatively well
established in Kenya during the colonial period, such banks showed little interest in the
indigenous African population. As the branches of metropolitan banks were designed to

settle accounts of the colonial economy, they were not interested in encouraging
savings amongst Africans or financing African enterprise (Engberg, 1995 and
Mkandawire, 1999). Further, the then commercial 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 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 and the wages of Africans were halved, these banks remained woefully
prosperous. Throughout the crisis, the Standard Bank of South Africa did not declare a
dividend less than 10 per cent. A good deal of property as well as money passed into
their hands during these years. It is to be noted that there was little evidence that the
banks proved adventurous in promoting industrial development in Kenya (Aaronovitch
S., and Aaronovitch K 1997).
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 than farmers, as 39 per cent of the
funds of the Land Bank were used to discharge existing mortgages with the private
bank and therefore, source of alternate credit did not increase the total availability of
credit (Aaronovitch S., and Aaronovitch K. 1997). Furthermore, though the mandate
of The Land Bank included provision of credit to ‘native farms’, the skewed land
3


tenure system where the lion’s share of African land was held under communal tenure,
made it impossible to lend to ‘native farms’ and by 1945, only one African farmer had
benefited from The Land Bank (Maxon, 1992).
1.4

Pre-Independence Growth -1950 - 1963

It was not until the 1950s that other banks began to be established. These banks

were mainly single branch banks, with their headquarters in Nairobi and focus on trade
finance (Central Bank of Kenya, 1996 and Engberg, 1995).
There are other structural features to be noted.


First, there was no central bank fulfilling the function of lender of the last resort.
In its place, there 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. Therefore, the supply of credit was fully determined by
commercial banks. The commercial bank advances their own resources and
funds borrowed from parent banks. Funds moved freely from the parent bank to
their branch as there were no capital account restrictions.



Secondly, prudential regulation was very lenient, with no statutory liquidity or
cash requirement ratios.



Thirdly, 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, 1995).
Table – 1.1 shows that during the period from 1950 to 1963, the levels of

deposits, assets and loans held by commercial banks in East Africa (and therefore
Kenya) grew substantially. It has been documented that banks tended to be very

conservative in applying credit standards, set by their head offices and these were not
realistic in the extremely underdeveloped countries in which they were operating
(Engberg, 1995). The unwillingness of banks to extend credit led to a situation in the
1950s when there was export of capital from the underdeveloped region to the
developed metropolis (Maxon, 1992).
The second important point to be noted is that the safety of deposits held by the
branches of the main banks did not depend on the quality of assets of these banks in
4


East Africa but were 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, 1997).
Table -1.1
Monetization, Assets and Deposits held by Banks in East Africa from 1950 to 1963
Deposits

Earning
Assets

Assets as % of
Total Deposits

Advances

Advances as % of
Total Deposits

£m

£m

%

£m

%

1950

64

22

34

17

27

1960

87

78

90

69

80

87

93

77

1963
121
105
Source: Central Bank of Kenya (2000)

The foreign banks had already established a reputation as ‘safe banks’ before
independence. On 30th June 1963, on the eve of independence, there were nine banks
operating in Kenya as given in Table – 1.2. The details of domestic banks (year of
incorporation and name of the banks) are given in Table 1.3.
Table – 1.2
Foreign Banks Operating in Kenya before and after Independence till date
Nationality (Place of
Incorporation)

Date of
Incorporation

Number of Offices in
East Africa

British

1896

70

Dutch

1951

4

India

1953

5

Pakstan

1956

1

Turkish

1958

8

1958

3

Tanzania
Source:Central Bank of Kenya (2000)

5


Table – 1.3
Domestic and Foreign Banks Operating in Kenya before and after Independence
S.
No

Bank Name

Year of
Incorporation

S.
No

1

African Banking Corporation Ltd

5/1/1984

22

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

Bank of Africa Kenya Ltd
Bank of Baroda (K) Ltd
Bank of India
Barclays Bank of Kenya Ltd
CFC Stanbic Bank Ltd
Chase Bank (K) Ltd
Citibank N.A Kenya
Commercial Bank of Africa Ltd
Consolidated Bank of Kenya Ltd

Co-operative Bank of Kenya Ltd
Credit Bank Ltd
Development Bank of Kenya Ltd
Diamond Trust Bank Kenya Ltd
Dubai Bank Kenya Ltd
Ecobank Kenya Ltd
Equatorial Commercial Bank Ltd
Equity Bank Ltd
Family Bank Limited
Fidelity Commercial Bank Ltd
Fina Bank Ltd

1980
7/1/1953
6/5/1953
6/5/1953
5/14/1955
4/1/1991
7/1/1974
1/1/1967
12/18/1989
1/1/1965
5/14/1986
1/1/1973
1/1/1946
1/1/1982
1/11/25
12/2/1995
28/12/24
1984

6/1/1992
1/1/1986

23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
39
40
41

Bank Name
Standard Chartered Bank
Kenya Ltd
Trans-National Bank Ltd
UBA Kenya Bank Limited
Victoria Commercial Bank Ltd
Gulf African Bank Limited
Paramount Universal Bank Ltd

Giro Commercial Bank Ltd
Guardian Bank Ltd
Habib Bank A.G Zurich
Habib Bank Ltd.
Imperial Bank Ltd
I & M Bank Ltd
Jamii Bora Bank Ltd
Kenya Commercial Bank Ltd
K-Rep Bank Ltd
Middle East Bank (K) Ltd
National Bank of Kenya Ltd
NIC Bank Ltd
Oriental Commercial Bank Ltd

Year of
Incorporation
1/1/191
8/1/1985
24/9/29
6/1/1987
1/11/27
1/1/1993
12/17/1992
12/17/1992
1/7/1978
2/3/1956
1/11/1992
1/1/1974
9/1/1984
1/1/1896

3/25/1999
1/1/198
1/1/1968
9/17/1959
8/2/1991

Source: Central Bank of Kenya (2013)
Notes:
1.

Includes banks and NBFIs and building societies placed under statutory
management by the Central Bank of Kenya (CBK).

2.

Financial institutions, listed on the same line, share common ownership.

3.

Central Bank of Kenya Annual Reports, in the section on banking structure
developments, did not give the name of the financial institutions that have been
placed under statutory management and liquidation but just the number of
institutions. Therefore, the author had to rely on newspaper articles to establish
the names of failed banks.

4.

Glad-Ak Finance was not put under statutory management but undertook
voluntary liquidation.

6


1.5

Creation of Government Owned Banks – 1963 to 1980
During the period of 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 Kenya Shilling (KShs.), was introduced on
14th September of 1966 at the rate of KShs. 20 to the pound (Central Bank of Kenya,
2012). At independence of Kenya in 1963, the prevalent understanding was that
development entailed massive resource mobilization and banks were seen as key
instruments in this resource mobilization. However, in Kenya, unlike most African
countries, there was no wholesale nationalization of all banks. This could be seen as
part of the broader strategy by Kenyan leaders at independence to accommodate
colonial interests and prevent a wholesale migration of foreign capital (Leys, 1995). At
independence, the first President, Jomo Kenyatta, assured the white settler community.
Therefore, the international banks now classified as foreign owned banks,
including Barclays D.C.O. and Standard Bank, continued to operate in Kenya. Only the
National and Grindlays Banks was bought out by the Government of Kenya (GoK) and
became the Kenya Commercial Bank (KCB) (Central Bank of Kenya, 1986). In 1974,
two American 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, driven largely
by commercialization of African small holder agriculture. In the first decade of
independence, GDP, at constant prices, grew at an annual rate of 7.1 per cent
(Hazlewood, 1989). The GDP ratio increased from 19 per cent in 1963 to 30 per cent in
1970 (Central Bank of Kenya, 1986). However, there was government dissatisfaction
with the pace of adjustment, in particular with the very low loans to deposit ratio of

64.6 per cent in 1969 (Republic of Kenya, 1988).
1.6

The Rise of Indigenous and Political Banks – 1980 to 1990 (Nyayo)
The first President of Kenya, at his death is 1978, was succeeded by President

Moi who was from the Kalenjin Community. The watchword chosen by Moi for this
Presidency was Nyayo, meaning footsteps, emphasizing continuity with the economic

7


policies of the first president era by remaining committed to a capitalist economy, with
the focus on attracting foreign investment and maintaining policies of Africanization of
the economy (Maxon and Ndege, 1995).
The 1980s witnessed the growth of a large number of NBFIs which increased
from 20 in 1980 to 53 in 1990 (a rise of 165 per cent) and the number of banks grew
from 17 to 20 (a growth of 17 per cent). The majority of these new financial institutions
were owned by local entrepreneurs (Kariuki, 1993).
The banking system was considered repressed in the McKinnon-Shaw Report as
interest rates up to the early 1980s were low and negative in real terms (Mwega, Ngola,
and Mwangi, 1990). It is worth noting that it had been the official policy in Kenya
since independence to follow a ‘low interest rate policy’ in order to encourage
investment and to protect the small borrower, the Central Bank of Kenya (1986). 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, 1998b).
1.7

Early Liberalization 1990 – 1994

The liberalization 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 liberalization was based on
the McKinnon-Shaw Report according to which the government control of interest
rates was seen as a key constraint to financial sector development.
The key step to full scale financial liberalization was the complete deregulation
of interest rates in 1991 (Brownbridge, 1998b). In 1992, the commercial banks were
authorized to deal in foreign exchange and in 1993, a market-determined flexible
exchange rate system was adopted for the Kenya Shilling (Brownbridge, 1998b).
The liberalization of interest rates and exchange rates provided further avenues
for local banks to compete with more established banks and it was an added stimulus
for local bank entry (Brownbridge, 1998b). While the 1980s witnessed the rise of

8


African (mainly Kikuyu) banks, the late 1980s and 1990s witnessed the rise of several
African (Kalenjin) and Asian-African banks. By the mid- 1990s, it is estimated that
local banks controlled about a quarter of the market (Brownbridge, 1998b).
Table – 1.4 shows the growth in the total number of financial institutions from
1990 up to 1993. The total number of banks grew by 67 per cent and the total number
of financial institutions grew by 13 per cent.
Table – 1.4
Numbers of Financial Institutions in Kenya during the period from 1963 to 2012
Banks

1963 1975 1980 1990 1993 1994 1997 1998 2000 2003 2012
9

14

17

24

40

37

53

53

49

43

41

NBFIs

3

8

20

53

60

44

19

15

5

3

7

Building
Societies

2

2

2

17

11

6

6

4

4

6

4

Total

14

22

39

94

111

87

78

72

58

52

52

Source: Brownbridge (1998b), Central Bank of Kenya (2000a, 2003, 2012)
Note: NBFIs - Non-Bank Financial Institution(s)
1.8

Bank Failures in Kenya
Table – 1.5 displays the names of banks that had failed in Kenya from 1984 to

2005. It is to be noted from the Table that the major failure banks could be grouped into
four periods, namely,1984 - 1989, 1993 - 1995, 1998 and 2000-2005.

9