Under normal circumstances, banks or any other companies merge or acquire each other, principally, in order to create value above that of the separately. This takes place when either banks or companies want to survive acute competition by reducing costs through economies of scale or want to grow big and compete better by increasing market share.
Bank mergers and acquisitions (M&As) are not a new phenomenon and virtually no country has remained immune to such changes. In the East African region, Kenya which is the market leader in financial services industry, has witnessed more than 20 mergers between 1994 and 2000.
Recently, the KCB Group, which is Kenya’s largest bank by assets, acquired the National Bank of Kenya while two other banks, Commercial Bank of Africa and NIC Bank, which have subsidiaries in Tanzania, also concluded merger agreement, which has created Kenya’s third largest bank in terms of assets, NCBA Bank Limited.
Our local experience
In the local market, the biggest and probably the oldest merger or acquisition in the banking sector happened when eleven commercial banks that were nationalized by the government following a change in the national economic policy in 1967, merged to form one massive state owned commercial bank named National Bank of Commerce (NBC).
In 1991, the financial sector was liberalized and privately-owned banks allowed to operate in the market. In 1997, the institution was renamed NBC (1997), after a split, which created three different entities. In 2000, a, South African financial services group, Absa Group Limited, acquired majority stake in NBC (1997) with the new entity being renamed NBC Limited.
More recently however, several mergers or acquisitions have taken place, which have further consolidated and strengthened the local banking sector. In May 2018, TPB Bank took over the former Twiga Bancorp and, three months later in August 2018, it acquired the Tanzania Women’s Bank (TWB).
Also in August 2018, Azania Bank acquired Bank M making it one of the largest banks in the market and it was followed by TPB Bank which in June 2020, acquired TIB Corporate Bank Limited propelling TPB to become one of the top 10 commercial banks in terms of assets value in the market.
Another acquisition was in November 2019 when Exim Bank took over the business and assets of United Bank Tanzania Limited, a subsidiary of Pakistan's UBL Bank. The acquisition made Exim Bank one of the top eight banks in the country with an asset base of about 1.3trn/-.
Advantages of M&As
Bank mergers help scale up and gain larger market share by the new entity which also boosts its capital base improving the ability to scale up lending and investments. Mergers and acquisitions may also lead to improved efficiency through consolidation of operational infrastructure and increase in product diversity.
This happens through a combination of unique products from the two merging banks. Mergers and acquisitions may facilitate the filling of product or technology gaps especially when a small bank is being acquired or merged with larger banks with better and more advanced technology. Last, but not least, M&As also provide the possibility of bolstering the staff team of the new bank, through combination of talents from the merging entities.
Negative side of M&As
It is important to note that despite the benefits of mergers, there are significant potential negative effects of such developments and calls for proper administration of the same. Mergers may prevent, restrict and distort competition in the market. Similarly, mergers and acquisitions face the challenge of cultural clashes between the banks that are coming together and also the challenge of harmonizing different systems and processes, rebranding the new bank and ensuring a clear understanding of the new entity’s business target.
These challenges can destroy shareholders’ value if not properly addressed. It is important to ensure therefore that managements of both entities communicate properly the reasons for the merger or acquisition and champion the integration process until the new entity is in place.
Apart from ensuring that mergers are objective and are properly handled by the merging banks, countries have put in place laws and regulations to minimize the negative effects of mergers on economies.
The objective is to ensure that mergers are controlled in order to facilitate a level-playing field, hence ensure fair competition in the marketplace. In Tanzania, legislations that govern mergers and acquisitions include: Banking and Financial Institutions Act 2006; Fair Competition Act, no 8 of 2003; and Capital Market and Securities Act, 1994.
In my assessment, mergers in Tanzania have so far been quite objective and well administered, a factor which has led to the creation of stronger post-merger entities which is a benefit to the industry, as well as the economy. Most mergers and acquisitions have been driven by the need to consolidate capital, following strict minimum capital requirements by Bank of Tanzania, the industry’s regulator.
Minimum capital requirements are set to ensure that banks have adequate capital to sustain operating losses while still honoring customer withdrawals. They also ensure that banks’ balance sheets are not dominated by investments that increase the risk of default.
Increase in competition in the banking sector has also been another major driver. As we are aware, the number of banks in the market has grown rapidly, from only two commercial banks prior to the liberalization of the financial sector in 1991 to 61 banks and financial institutions at the moment. This has led to stiff competition in the sector, with small banks facing the danger of being forced out of business.
Given the positive outcomes of mergers and acquisitions in Tanzania, we believe that banks will continue to evaluate themselves and if necessary create mergers or acquisitions which will be a win - win situation to the merging banks.