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Centum Investments says part of the reason it chose to exit Sidian Bank was that the lender needed more capital to enter the tier-two level and capitalise on economies due to constraints of the risk-based pricing model.

Centum Chief executive James Mworia said the risk-based pricing model which the Central Bank of Kenya has introduced means that banks don’t price loans based on the cost of funds plus a profit margin but instead you price the risk based on the risk of the borrower.

“It, therefore, means that for you to earn a reasonable return on equity, scale is critical. You cannot pass the inefficiencies of smallness to the customer. You have to optimise either your processes or increase your capital which we have done,” he said.

For that reason, Centum increased its stake from 64 per cent to over 80 per cent by investing over Sh2 billion having invested Sh2 billion earlier. Mworia also said that banks are at the moment delivering reduced returns on investment unlike in the past due to various changes in the market.

Listed banks

“If you look at the listed banks, because of all those changes that have happened, multiples have come down, when we got into banking 2014 it was not uncommon for banks trading at a price to book of 2x or 2.5x, but now the top bank is at 1.1x returns to book,” he said.

“So we ended up having an option to exit at a price to earnings ratio of 10 times, the other option we had to grow earnings is to add more capital,” he added.

He was speaking on Twitter Spaces hosted by Mwango Capital following news that Nigerian-based Access Bank was buying Sidian Bank from Centum.

The move by Centum to offload the bank perhaps shows that small banks may face a tough time due to the risk-based model, lack of scale and high cost of capital.

The risk-based pricing was a major bottleneck for Sidian Bank, meaning the bank needed scale and hence more capital.

Mworia said the collapse of Imperial Bank and Chase led to a high cost of funding for small banks. The increased cost of funding for small banks made it difficult for Sidian Bank to thrive.

“The whole business model was blown out so we had to pivot towards SME financing, as the business went from profitable to lose making,” said Mworia.

He said the bank’s name was changed from K-Rep to Sidian to shake off the Nongovernmental organisation (NGO) tag or perception and focus the bank on commercial lending.

Centum Investment Company last week announced plans to sell its 83.4 per cent equity holding at Sidian Bank to Nigeria’s Access bank for Sh4.3billion.

Centum said in a statement the deal with Access Bank, a subsidiary of Access Holdings, was still subject to regulatory approval in Kenya and Nigeria.

Mworia said the transaction stands as one of the largest private equity transactions in East Africa and reflects a strong commitment by Access Bank to the future of the Kenyan economy.

Strategic sectors

“The proceeds from the sale will enable Centum to continue investing across strategic sectors in Kenya and the East African region,” he added.

Centum Investments last week announced a binding agreement to sell 83.4 per cent stake in Sidian to the Nigerian lender, which has been on an acquisition spree in Africa.

The deal is the latest in Kenya’s banking sector, where tougher supervision by the central bank and the proliferation of lenders have sparked a consolidation round in the industry since 2017.

Access Bank acquired a 99.98 per cent stake of Transnational Bank in 2020 from Close associates of former President Daniel Moi in a deal valued at Sh1.56 billion.

Access, which has assets of $25.5 billion, focuses on corporate retail banking and it is expected to boost the growth of Sidian.