Analysis of internationalization of banking in emerging markets: a case of Kenya

Paradigm shift in financial intermediation globally from inward looking operations to outward vibrancy in provision of services has been attributed to emergence of globalization. Globalization has made many countries to liberalize their financial markets. For nearly two decades, banking across the world has evolved from initial blue chip targeted clientele towards financial inclusivity for economic development and poverty eradication. The research problem of this study therefore is how internationalization of banking in Africa was approached, with special reference to Kenyan banks. In understanding this, the study provides an analysis on trends of internationalization, strategies employed and whether it has provided competitive edge for Kenyan indigenous banks expanding in East Africa. The international theories of a firm (The learning, the inter-governmental, the strategic competition and the institutional-economic perspectives) are main theoretical lenses guiding the study. A deductive descriptive approach has been used to carry out the study. The study moves the internationalization process from a generalized point to a particular scenario in Kenya where three Kenyan, relatively large banks, the Kenya Commercial Bank, Equity Bank and Cooperative Bank of Kenya have been used as case studies and Eco-bank used to as an experiential benchmark for the study. The study has relied heavily on secondary data from the International Monetary Fund, World Bank Reports, and Central Bank Reports among others. Findings show that African banking industry is rapidly growing, driven by market and increased investment in information technology which has strengthened innovation. Emergence of new segmented markets such religious banking, unsecured loans and mobile banking are the emerging frontiers for leveraging Pan-African banking. Across the continent, there are sovereign bonds being floated which provide good tidings for inter-country banking expansion. East African region was found to be malleable with regulatory framework for cross border trade. The EAC is fast emerging as a powerful economic hub facilitated by cross-border banking. A lot of regional policy activities are going on aimed at harmonizing the banking supervisory, licensing and regulation to enable faster growth and move towards East African Monetary Union by 2024 and single currency use. The study found that the foreign banking ownership in Africa and even East Africa is gaining momentum with nearly half of total banking assets being foreign owned in respective countries. In Kenya, the internationalization process is unique. Banks apply four distinctive models: Greenfield approach, the use of diaspora and agency banking, follow-the-customer and collaboration/cooperation models. The role of CBK was lauded for leading the pack towards East African integration by show casing good monetary policy implementation, fostering the liquidity, solvency and proper functioning of cross-border financial system. Policy development in Kenya has propelled the expansion of Kenyan banks in the region. Among the operationalized legal and regulatory framework include Proceeds of Crime and Anti-Money Laundering Act (2009), issuance of guidelines on agency banking, and rolling out of the credit information sharing mechanisms. The study concludes that the internationalization strategies common to Kenyan market include: subsidiary development, follow-the-customer model, the agency and internet banking, and diaspora banking models. The performance of the Kenyan banks in terms of assets, deposits, profitability and innovation has increased since they got involved in cross-border banking. The strategy of expanding the branch network, both within Kenya and in the greater East African region, automation of service needs and globalization challenges has enhanced the growth. One key recommendation is that policies should be generated to cushion Kenyan banks from risks associated with destination country challenges like in the case of Burundi and South Sudan. The expansion of banking must be conducted in a manner that does not marginalize the banking sectors of neighbouring countries as this could provide a blacklash. Lastly, diaspora banking must be well organized to reduce incidences of money laundering and terrorism financing.