National bank of Kenya limited is a financial institution engaged in the provision of services such as banking, financial and others related to these. The bank owns two subsidiaries namely: Natbank Trustee and Investment Services Limited and the Kenya National Capital Corporation Limited (Kariuki 2010). This bank has encountered several problems over the last few years and the country’s central bank which monitors the operations of all financial institutions in the country has predicted that unless the bank changes tact, it will be bedeviled by the same problems over the next couple of years. These problems include demand and supply problems, economic problems, non performing loans portfolio as well as technology problems (Kariuki 2010).
According to reports from the central bank, the bank’s nonperforming loans accounted for about 43.5% of the total loans in the month of June (Kariuki 2010). This was above the industry range which was estimated to be 15.8%. These nonperforming loans can be attributed to reckless lending policies. Statistics from the central bank also indicate that the bank has a huge revenue deficit of four billion Kenya shillings (Kariuki 2010). This deficit is to be settled through realized profits. Economists from the central bank however indicate that this may not be feasible as the bank is unlikely to issue dividends, a move that may see many share holders desert the bank hence a profit dive (Kariuki 2010). The bank’s total capital base as a percentage of total risk weighted assets has not reached the statutory threshold which is placed at 12%. Its estimated to be at 10%, a fact that makes payment of dividends further impossible. Due to the huge nonperforming loans, the bank decided to go slow on lending, a move that saw many of its customers move to the less risky investments. These investments include but not limited to: Government securities such as treasury bonds and treasury bills (Kariuki 2010).
Statistics from the central bank show that the bank’s loans to private households declined by 19.7% while lending to finance and insurance sectors reduced by 25.3% last year (Kariuki 2010). The central bank predicts a further reduction in these two for the next few years. The emergence of many micro-finance institutions such as K-Rep, Jamii Bora Trust, and Kenya Women Finance Trust, which have captured the low-end of the market has compounded the problems facing the bank further (World Bank [WB] 2010). This is because, these microfinance institutions offer lower lending interest rates on their loans hence attracting many unbanked citizens who may have been absorbed by the National Bank (Kariuki 2010). The location of these micro-finance institutions enable them to capture more customers. This is because they are spread throughout the country’s rural areas where majority of the unbanked citizens reside. The bank adopted a policy of high interest rates on its loans so as to cover their level of exposure, a move that greatly reduced the demand for the bank’s loans (WB 2010).
The introduction of mobile banking by the country’s leading telecommunication company, Safaricom limited has also been a thorn in the bank’s flesh. Many people in Kenya who had not been captured by the banking world found it simpler to start accounts with the telecommunication company (Omwansa 2010). This is because of the convenience involved in carrying out transactions which involves simply the use of mobile phones. Mpesa is the name given to the mobile banking of the telecommunications company (Omwansa 2010). Mpesa customers are able to carry out transactions such as paying bills, money transfers, shopping in supermarkets using phones, and many more other transactions. The demand for accounts in this bank and others in the country is expected to reduce as more people jump into the mobile banking band wagon (Omwansa 2010). The problem is expected to get worse as more telecommunication companies in the country have emulated Safaricom. For instance, the country’s second largest telecommunication company by customer base, Zain Kenya has introduced a similar mobile banking program called Zap (Omwansa 2010).
Many banks in the country have introduced a technology that enables bank customers to manipulate their bank accounts using mobile devices. Failure by this bank to follow suit has made it fail to attract potential customers (Omwansa 2010). This technology allows customers to transfer money from their banks to their mobile phones which they can then withdraw through the telecommunication companies’ money outlets such as Mpesa and Zap (Omwansa 2010). This saves them the inconvenience of travelling to the banks to transact. The country’s third largest telecommunication company by customer base, Yu has also entered the mobile banking band wagon through its Yu cash. This has captured even more customers whose destiny would otherwise have been in the banking world (Omwansa 2010).
The country has witnessed an explosion of pyramid schemes which have lured many citizens into depositing money with them. These schemes have convinced many people to withdraw money from their bank accounts which has led to a poor performance by the banks (Jack 2010). This is because, money which the banks could have issued as loans is now disappearing into the pyramid schemes. These schemes operate on a simple principle; people who bank with them first benefit from funds brought in by subsequent customers when their pay time comes (Jack 2010). If the number of people qualifying for payment exceeds the amount of money brought in by new customers, the owners of the schemes disappear with all the investments. If the country’s central bank doesn’t control the operations of these pyramid schemes, then banks are expected to suffer more in the next few years (Jack 2010).
The economy of the country performed poorly in the last financial year as a result of a post election violence. This has also greatly affected the bank since the government is its largest shareholder . Poor economic performance also translates to lack of funds to put into bank accounts by the bank’s customers hence the bank is affected adversely (Jack 2010). If the performance of the economy is not turned around in the next few years, then the bank is expected to perform more poorly.
The diagram below shows the likely demand and supply situation in the bank over the next three years. This is still the current situation. Reduction in supply has been witnessed since the bank has been forced to close down some of its branches due to the poor performance. The bank is expected to close more of its branches in future if the problems are not solved. Closing down of accounts coupled with the problems discussed earlier has led to a decrease in demand for the bank’s financial services.
To turn around this poor performance, the bank should consider a number of solutions. Firstly, the bank should consider expanding to the rural part of the country in order to capture unbanked people from the low-end of the market (Jack 2010). The bank should also consider a reduction in its loans interest rates in order to increase the demand of the same (Jack 2010). The bank should also consider introducing a technology that would allow customers to manipulate their bank accounts using mobile devices. However, for the bank to keep a competitive edge over the others in the same line of production, they should do this differently. Instead of cooperating with the existing mobile networks, the bank can consider coming up with its own platform. This is because, the telecommunications firms are also themselves involved in mobile banking, so collaborating with them amounts to collaborating with a competitor. This can only be to the advantage of the competitor (Jack 2010). The bank should also reduce the requirements for opening an account with them. These requirements include minimum deposit, passports, ATM processing fee etc. while passports are quite important, the bank can consider purchasing cameras for taking the passports without charging the customer (Jack 2010). The bank should also consider increasing the number of marketers so as to capture as many potential customers as possible. Opening many ATM machines throughout the country would also go a long way in helping the bank turn around its poor performance. Lastly, the bank should pressurize the central bank to come up with policies which discourage the mushrooming of pyramid schemes (Jack 2010).
This paper has discussed the problems afflicting the National Bank of Kenya. These problems have included: nonperforming loans, huge revenue deficit, competition from micro-finance institutions which offer loans with lower interest rates, low customer base due to failure to capture rural areas, competition from telecommunications companies which have invested in mobile banking, failure to take advantage of modern technology involving mobile banking and finally competition from rogue pyramid schemes. Solutions which can turn around this poor performance have also been discussed. These have included: expanding to the rural part of the country in order to capture unbanked people from the low-end of the market, introducing a technology that would allow customers to manipulate their bank accounts using mobile devices, reducing the requirements for opening an account with them, introducing more ATM machines and finally pressurizing the central bank to come up with policies which discourage the mushrooming of pyramid schemes.