* Cap on commercial rates in September pummelled shares
* Kenya banks' profitability highest in Africa before cap
* Mobile banking seen as way to expand loan base cheaply
By Duncan Miriri
NAIROBI, Oct 19 Kenyan banks are focusing on mobile banking to lower costs and build new revenue streams after the government capped commercial lending rates, but they face several years of work to recover from the hit to profitability, bankers and analysts said.
The cap imposed last month limited commercial rates to 400 basis points above the central bank's main rate, now 10 percent. Banks previously charged 18-20 percent or more on loans, helping create some of the most profitable institutions in Africa.
The cap pummelled bank shares and executives have been scrambling to adjust strategy. Many institutions have focused on mobile banking to expand business in a nation of 46 million people, where many people do not have a bank account.
"We must go digital and deliver products more cheaply," said John Gachora, chief executive of mid-tier NIC Bank, echoing comments from lenders both big and small.
But it will be tough matching earnings before the cap. The average return on equity for listed banks was 21 percent in 2015, the highest in Africa, and compared with 18 percent in South Africa and single digits for European and U.S. banks.
Nairobi-based Standard Investment Bank (SIB) expects returns to fall to 16 to 18 percent after the cap, which included a floor for deposit rates.
For now, just 2 percent of loans offered by Kenya's 11 listed banks are issued via mobile platforms - a cheaper route that promises to reach more customers - so it will take time to make up losses from the more traditional loan market, SIB said.
"That is not a two-, three-year process but a longer process," SIB bank analyst Francis Mwangi said.
Kenya has pioneered mobile transactions. Mobile operator Safaricom's M-Pesa, launched in 2007, lets customers pay bills or transfer cash on the simplest handsets. Safaricom also runs the M-Shwari banking platform with privately owned CBA Bank.
Such platforms cut staff and other overheads in the loan process, and mean money is made even on loans of a few dollars.
"You may need one sales person and one person internally if you can digitise," NIC's Gachora said, saying a traditional loan process usually passed through three employees.
M-Shwari, launched in 2012, has 16 million customers and offers 70,000 loans a day - averaging 3,250 shillings ($32) each. Top lenders, even with big branch networks, process 1,000 loans a day, although they are larger, bankers said.
KCB, Kenya's biggest lender by assets, wants to spin off its mobile banking platform KCB M-Pesa, operated with Safaricom and with additional saving and borrowing features over the more basic transactions app, so it has autonomy to grow.
KCB M-Pesa has 10 million customers, while KCB has 3 million traditional bank clients.
KCB wants mobile banking to generate 50 to 60 percent of revenue in five years, from below 2 percent now.
"The customer lifestyle is already changing so we need to be playing in the space that our customers of the future are going," KCB Chief Executive Joshua Oigara said. ($1 = 101.2200 Kenyan shillings) (Editing by Edmund Blair and Alison Williams)
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