Rwanda’s banking industry has seen increased activity in mergers and acquisitions (M&A) since 2016, with regional and foreign financial services providers acquiring local banks.

This M&A activity has raised questions and concerns of whether the banking industry has not become more concentrated since by definition, an increase in M&A results in fewer, but larger banks dominating the market.

The banking sector is currently dominated by a few large players, including Bank of Kigali (BK Plc), Equity Bank Rwanda, BPR Bank Rwanda, and I&M Bank Rwanda.

Until 2016, the banking industry comprised 11 commercial banks. By 2023, this number had reduced to nine after CBA Group acquired Crane Bank Rwanda in 2016, KCB Group acquired BPR in 2021, and Equity Group acquired Cogebanque in 2023.

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M&A activity since 2016

In October 2016, Attijariwafa Bank, a Moroccan banking group, signed the acquisition agreement to acquire Cogebanque and later that year completed the acquisition of 76.19 per cent majority stake in the bank at $41 million.

In 2016, Atlas Mara merged BPR with the commercial banking wing of the Development Bank of Rwanda (BRDC) that it had acquired in 2014, giving Atlas Mara the controlling stake in BPR with 62.1 per cent of shares, with Arise remaining with 14.6 per cent and 23.3 per cent retained by local shareholders.

In the same year, CBA Group secured a microfinance banking license to operate in Rwanda after acquiring Crane Bank Rwanda, a commercial bank, whose parent company in Uganda had been sold and the buyers did not want to keep the Rwandan subsidiary.

Linah Higiro, the former CEO of NCBA Bank Rwanda, and one of the executives who oversaw the acquisition of Crane Bank by CBA Group, says when Crane Bank was acquired in 2016 it had capital and governance challenges at the holding level.

"Today NCBA boasts one of the most successful financial inclusion services with the largest digital customer base over 4 million, total credit injected into the market of Rwf324 billion from inception, and retained deposits of almost Rwf15 billion – all due to its advanced lending and savings product MOKASH delivered in conjunction with MTN,” she argues.

Higiro asserts that within the first 3 years the bank could participate in significant national projects like the Inyange Milk Powder Plant, Bugesera Airport, Cimerwa, and MTN, thanks to NCBA Group’s strong capital position.

"All this would not have been possible without an acquisition,” she says.

NCBA Bank may have gotten bigger and better as a result of further group capital injection, but there is no proof to suggest that customers now benefit from efficiency gains such as lower interest rates or less management fees than they were before the acquisition.

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A few more acquisitions have taken place since then.

In 2020, the Kenya Commercial Bank (KCB) Group entered a share purchase agreement for the purchase of 62.06 percent of the issued share capital of Banque Populaire du Rwanda.

In, 2021, KCB Group completed the acquisition of Banque Populaire du Rwanda from Atlas Mara, merging it with its existing operations in Rwanda to form BPR Bank Rwanda Plc.

In 2023, Kenyan financial service holding company Equity Group Holdings paid a cash consideration of Rwf58.96 billion to acquire 99 per cent stake in Cogebanque, subsequently leading to a merger with Equity Bank Rwanda.

These mergers and acquisitions have significantly shaped the banking landscape in Rwanda, with several regional banking groups expanding their presence in the country.

Some banking experts had anticipated that this nature of consolidation would strengthen the banking sector, increase competition, and improve financial services in the country.

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The case of concentration

The mergers and acquisitions that have happened in the banking industry in Rwanda since 2016 have resulted in fewer, but larger banks dominating the market.

However, the industry presents an interesting case whereby on the backdrop of increasing assets, the market is less concentrated as more mergers and acquisitions take place.

"Mergers and acquisitions lead to high concentration and high prices for consumers. But the narrative is different for the case of Rwanda because the market is becoming less concentrated,” says Eric Niyongira, one of the authors of a recent report on the state of banking in Rwanda.

Researchers from the Rwanda Bankers Association (RBA) measured concentration by looking at the market share of each of the nine commercial banks that currently operate in the country.

They found that the combined balance sheet size of the top three banks as a share of the industry balance sheet declined from a high of 76 per cent in 2016 to 60 per cent by September 2023.

Similarly, the Herfindahl-Hirschman Index (HHI), a metric for market concentration, showed that the market was becoming less concentrated even as mergers and acquisitions happen.

A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.

According to RBA’s state of the industry study, the HHI index decreased from 2,415 in 2016 to 1,796 in 2023, indicating a decline in market concentration.

This contradicts the commonly and widely held view that when mergers and acquisitions increase, it leads to market concentration. It then begs the question whether until 2016, before we saw an upturn in M&A activity, the market was either overbanked or fragmented.

Siongo Kisoso, an investment banker and the current CEO of BK Capital, maintains that in principle any consolidation that involves leading players would lead to market concentration.

"The consolidation of market share through mergers and acquisitions can lead to increased market concentration, particularly when the top players are involved,” he says, suggesting that one would have to look at how the market share of the five leading banks have fared over the years.

Still, Kisoso says if indeed the banking consolidation has led to less market concentration, then "it is important to assess whether this concentration has resulted in improved or worsened consumer outcomes.”

To understand whether the concentration has led to better or worse consumer outcomes, one has to look at the net interest margins, among other metrics. Lower margins suggest that competition has become tighter, thus leading to better consumer outcomes.

RAB data indicates that net interest margins in the banking industry have remained relatively stable between 2016 and 2023, fluctuating within a narrow range of 8-10 per cent.

While net interest margins slightly declined from 9.9 per cent in 2016 to 9.6 per cent in September 2023, the overall trend suggests stability.

Further analysis

We conducted a comprehensive analysis of publicly available financial statements, industry reports, and media coverage, which revealed that the top five commercial banks in Rwanda held a market share of approximately 74.6 per cent as of the end of 2016.

In 2016, the market was controlled by Bank of Kigali (32.9%), Banque Populaire du Rwanda/Atlas Mara (13.7%), Ecobank (10%), Cogebanque (9%), and KCB Bank Rwanda (9%).

We did a further analysis using the Herfindahl-Hirschman Index (HHI) and it indicated a moderate level of market concentration, with an HHI value of 2,177.26 as of December 2016.

The concentration has since then increased, our analysis shows.

A market analysis reveals that four leading banks dominate the Rwandan commercial banking sector, collectively controlling 80.7 per cent of the market as of December 2023. The remaining 17.6 per cent is fragmented among smaller players.

Bank of Kigali’s market share has increased by 3.6 percentage points to 36.5%, Equity bought Cogebanque to consolidate its position with 17.7% market share, BPR merged with KCB Bank Rwanda taking a market share of 14.8%, while I&M Bank increased its to 11.7%.

Out of the top five banks that were leading the industry, only Ecobank lost its market share by 3.6 percentage points to 6.4%.

The Herfindahl-Hirschman Index stood at 2,314.12 by the end of 2023, indicating an increased level of market concentration, suggesting potential concerns regarding competition.

It remains to be seen whether the market will witness further M&A activity and whether this will raise more concerns among small players, and perhaps prompt the central bank to tighten the rules.

For now, there is a need to maintain healthy competition in the banking industry.