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Family Bank has dropped a buyout plan in South Sudan in favour of establishing a subsidiary from scratch in the new market, citing lack of suitable acquisition targets.
The micro-lender’s chief executive Peter Munyiri said it has opted for a joint venture with Sudanese investors to gain smooth entry into a market where foreign-owned firms face cultural and regulatory hurdles because of rising nationalism. Under the deal, Family Bank will invest about $9 million (Sh810 million) in the venture, earning it a 60 per cent stake in the $15 million (Sh1.3 billion) investment. It expects to start operations early next year.
Family Bank had initially planned to buy a majority stake in one of the Sudanese banks, including Nile Commercial Bank, Ivory Bank, Buffalo Commercial and Mountain Trade and Development banks to reduce regulatory burdens and fast-track the investment.
"We have not found a suitable target and we will set up the operations ourselves," Mr Munyiri said. "We will now have a joint Greenfield venture with local investors there but Family Bank will retain a controlling stake. We will target up to four branches by the end of 2012."
An acquisition could have provided an easier solution compared to a start-up, which could involve buying land, putting up buildings, hiring local staff, seeking regulatory approval, struggling to lure deposits and fighting for market share against established rivals. It becomes the second Kenyan bank after NIC to announce it is dropping its takeover bid to start operations from scratch in a regional market where high buyout prices is discouraging Kenyan banks from participating in mergers and acquisitions. The high prices are as a result of increased interest from Kenyan and West African investors that is forcing local banks to turn to start -ups.
The venture into South Sudan marks Family’s first move in regional expansion, following KCB and Equity banks whose earnings have been boosted by their subsidiaries in the regional market.
South Sudan is shaping up as a fertile ground for growth for local and international companies after seceding from the North, and Kenyan financiers are racing to seek a foothold in the market to be part of the expected boom.
Already, KCB and Equity Bank are generating outsized profits in South Sudan, after operations broke even faster than other subsidiaries. For instance, KCB last year generated a profit of Sh580 million from South Sudan compared to losses of Sh409 million in Uganda, Rwanda (Sh317 million) and Tanzania (Sh110 million).This is what is egging on Family Bank to move to South Sudan as part of its regional expansion and it looks to handle large transactions in the Kenyan market, especially lending to companies and project finance.