Opinion | How Tier One Commercial Banks Laughed All The Way To The Bank

Commercial banks in Kenya have been on a methodical mission and executed a number of sublime strategies that have hitherto strengthened their capital adequacy, expanded digital services and deepened financial inclusion, thus becoming resilient drivers of economic growth.

According to the Central Bank of Kenya’s 2024 Annual Report, commercial banks are classified using a composite index that accounts for net assets, capital reserves, and deposits.

Tier 1 or large banks have an index above 5%, and this segment comprises nine banks, including KCB, Equity, Co-operative, NCBA, Absa, Stanbic, StanChart, I&M, and Diamond Trust Bank.

Tier 2 or medium-sized banks have a weighted index between 1% and 5% and are nine in number, while Tier 3 or small-sized banks have a weighted index below 1% and are twenty-one.

All the Tier 1 banks are listed on the Nairobi Securities Exchange and are therefore obliged to publicly present their financial reports annually. The recently presented financial results showed that the top-tier banks were robust and adept in their financial undertakings.

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This was manifested by the cumulative net income for the nine top tier banks at approximately Shs.275 billion for the financial year ending March 2026, representing almost 90% of the banking sector’s profitability.

Equity bank posted epochal results, and it outpaced peers with a mind-bending net income of Shs.75.5 billion. Of all the top tier banks, only StanChart reported a 38% slump but still made a net profit of Shs.12.4 billion.

To put these banks’ net income growth in perspective, the returns have followed a steady trajectory in the preceding period of five years to 2025.

For comparison purposes, in the financial year ending March 2020, Safaricom Plc, a telecommunications giant, was recognized as the most profitable company in East and Central Africa at the time, having posted a net profit of Shs. 74.7 billion, while Equity Bank and KCB posted Shs. 20.1 billion and Shs. 19.6 billion, respectively.

Based on Safaricom’s superlative performance, it took the cumulative net profit of the top six commercial banks to match the telco’s net profit.

However, over the succeeding five years, Kenya’s top two banks, namely Equity and KCB, have steadily surged, closing in on Safaricom’s stellar financial performance.

In the financial year ending March 2026, Safaricom announced a net income of Shs.69.8 billion, beating KCB by slightly over Shs.1 billion, but was overtaken by Equity Bank which led the pack posting Shs.75.5 billion net profit, a whole Shs.6 billion and Shs. 7 billion ahead of the financial behemoths Safaricom and KCB, respectively.

Looked at with a discerning eye, it is noteworthy that top-tier commercial banks have indeed leveraged their capabilities and fully realized their performance relative to competitors in Tier 2 and Tier 3, as well as other sectors of the economy.

Leveraging their structural capabilities, these top-tier banks have taken full advantage, maintaining a wide spread between the Central Bank Rate (CBR) and their lending rates and maximizing net interest income.

The banks upended the introduction of the risk-based credit pricing model to their advantage, whereby although the Central Bank of Kenya envisioned that all banks would adopt the Kenya Shilling Overnight Interbank Average (KESONIA) framework as the benchmark for pricing new variable-rate loans from the beginning of September 2025 and continuing variable-rate loans by the end of February 2026, the adoption rate remained underwhelming.

Based on reports by the Kenya Bankers Association and the Central Bank of Kenya’s Credit Officer Survey, a number of banks complied with and adopted the KESONIA framework, while a major segment of the banks continued to predetermine their lending rates based on the Central Bank Rate, and a few others had mixed rate applications.

The non-compliant banks have cited the volatile nature of KESONIA compared to CBR, which leads to frequent reviews of lending rates and system upgrades, as well as changes to internal documentation.

Although the numerical difference between KESONIA and CBR oscillates and is negligible, suffice it to say that uniformity and consistency in adopting the postulated policy by players in the banking sector ought to be a necessary requirement.

One would have expected that the policy direction, as intended and stipulated by the Central Bank of Kenya, ought to have been promptly acquiesced to by all commercial banks to ensure a common basis for loan pricing.

Even if the CBK guidelines allowed the use of CBR as a fallback when KESONIA was unavailable or impractical, it is clear that they have given banks carte blanche in their choice.

In addition, despite the consistent reduction in the Central Bank Rate throughout 2025, most commercial banks maintained a slow response stance to the developments, and sustained high lending rates, which saw the institutions earning handsomely on net interest income given the widened margins, and that was evident in the financial reports by the banks.

The other aspect that immensely contributed to the stellar performance by the top-tier banks was their deliberate strategic focus to dynamically expand regionally, and the move has yielded fruits across these multinational banks.

The subsidiaries operating in foreign countries have become robust profit centers and contributed substantially to the overall bottom line. Based on Equity Group’s filings, regional branches contributed upwards of 51% to the group’s overall profit before tax. In the same breadth, KCB Group’s regional branches contributed approximately 32% to the group’s profitability.

The positive contribution to profitability streak was also reported by I & M at 24%, and NCBA at about 13%. However, Diamond Trust Bank suffered a slight loss of Shs. 0.5 billion on its exit from the Burundi subsidiary, as well as from Cooperative Bank’s South Sudan subsidiary, which returned a mixed bag due to the country’s instability and currency volatility.

Overall, the contribution of the subsidiaries in foreign countries was significant, and, aside from bolstering the multinational banks’ local net income, they served as a hedge against volatility evident from time to time in our local macroeconomic environment.

The top tier banks have over the years been investing substantially in the risk-free government paper especially treasury bills and treasury bonds, however, with the consistent plummeting in the yield owing to the steady reduction in the Central Bank Rate, the net earnings from this stream drastically reduced.

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Another focus area that catapulted the banks’ earnings was digitalization and non-branch initiatives, with heavy investments in automation resulting in substantial operational cost savings over the long run. The majority of transactions were shifted to digital channels, including mobile applications, internet banking, and secondary peripherals such as intelligent automated teller machines that allow customers to conduct a wide range of services without visiting the brick-and-mortar branches.

Although investment in agile technology substantially constituted a big part of operating expenses, these initiatives saw banks attaining higher efficiency levels, and from collated status reports on information technology, most of the top-tier banks had achieved between 85%-95% of transactions being undertaken online.

The transition contributed to most top-tier banks reporting lower cost-to-income ratios, a boon for efficiency, implying that fewer resources were needed to generate higher income. However, the elephant in the room remained the high provisions for non-performing loans, which impaired the banks’ cost-to-income ratio.

Lastly, over the top-tier banks have diversified into fee-based portfolios and offerings such as wealth management, bancassurance, investment, and advisory services, from which substantial non-interest revenues were earned in the form of transactional fees and commissions, forming a significant cog in their overall profitability. Compared with other sectors, banking has stood out and remains on course for improved future performance, especially if the macroeconomic environment remains stable and resilient.

This Opinion Article has been written by Dr. Patrick Dan Mukhongo, a Project Management Consultant.