AFRICA INVESTMENT-Intrepid bankers reap rewards in Africa's newest state

* South Sudan among world's toughest business environments

* More than 25 banks now operate in nation founded in 2011

* Lack of skilled workers, infrastructure hinders growth

* Row with Sudan over oil pipeline hurt south's cash flow

By Andrew Green and Duncan Miriri

JUBA/NAIROBI, Dec 5 (Reuters) - Kenya Commercial Bank started small in Africa's newest nation, South Sudan -very small.

Executive Martin Oduor-Otieno, sleeping in a tent at night,found a shop he could rent in Juba that was just big enough tofit a partition and grill, the basic requirement to open KBC'sfirst branch.

That was in 2005. KCB now has 21 branches in South Sudangenerating 9 percent of the group's 15.2 billion Kenyanshillings ($175 million) in pretax profit for the first ninemonths of 2013.

The scope for banking expansion in Africa looks vast. Barelya quarter of Sub-Saharan Africans have a bank account, accordingto World Bank figures. In most rural areas of South Sudan, anation of 11 million people, there is no banking at all.

But what KCB's profit breakdown does not reveal is thehurdles to setting up an operation in a frontier market likeSouth Sudan, a nation born in 2011 when it split away from Sudanto the north.

"There is a lot of opportunity," said Francis Mwangi, abanking analyst at Nairobi-based Standard Investment.

But with South Sudan ranked 186th of 189 nations in theWorld Bank's ease of doing business survey, Mwangi said: "Youhave to be thick-skinned to enter some of these markets."

Running a bank in the young nation means finding scarceforeign exchange, accepting limited regulatory protection,hiring skilled workers where most people have never been toschool and finding a sturdy enough building to house a branch.

That was the one of first challenges for Oduor-Otieno, whowas KCB's deputy chief executive when he visited in 2005 andstayed in a hotel made of tents pitched beside the Nile.

"They erected my tent as I watched," said Oduor-Otieno, whorose to become KCB's chief executive before moving to Deloitte.

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He and five other KCB executives were pioneers, visiting in2005 just months after leaders in what was then the southernregion of Sudan signed a deal to end two decades of civil war.

"If you look at banks, there was literally nothing on theground at the time," he said.

Six years later, South Sudan declared independence. Now, more than 25 banks operate there, officials say.

There are also relatively plush hotels opening - but stillalmost no tarmac roads in a nation the size of France.

That has not stopped KCB opening branches in all 10 of thenation's states - the only bank with such reach - andcompetition is mounting.

"The demand is enormous and the banks are just mushrooming,"said Zahia Lolila, coordinator for advisory services at theWorld Bank's International Finance Corporation (IFC) in Juba.

The central bank, built out of a branch of the formerheadquarters in Sudan's capital Khartoum, is "full of ambition",Lolila said.

But "you're building an institution from zero. You don'thave bank supervisors. Facilities, equipment, computers,management information systems - everything has to be built fromscratch." That includes applying for a SWIFT code for thecentral bank - a basic requirement for banking transactions.

Then there is the literacy rate: 40 percent for men and just16 percent for women. The government demands that most staff inany bank must be locals.

VITAL OIL FLOWS

"Experienced staff, experienced bankers, experienced in anyarea, there are (only) a few," said Willis Osir, managingdirector of the Co-operative Bank of South Sudan, seated in agleaming, four-storey building in one of the few areas wherebuildings boast more than a ground floor.

Osir said his bank, a venture between Kenya's Co-operativeBank and South Sudan's government that opened thisyear, has a training programme which sends young locals to learnthe trade in Kenya, east Africa's economic powerhouse.

Foreign currency is another headache. When a political spatbetween South Sudan and Sudan led to a 15-month shutdown of anoil export pipeline running through Sudan's territory, the flowof dollars dried up.

"They (the government) have one sole source of foreigncurrencies - that is oil," said Osman Ahmed Osman, deputygeneral manager of South Sudan Commercial Bank.

Oil exports resumed in April. But securing enough hardcurrency day-to-day for clients is still not easy.

"We have enough to keep going, just to cover the basic needsof our customers," Osman said.

Most of the business is still just deposits and cashwithdrawals. Lending is a challenge when few can offercollateral, such as title deeds. "Most small businesses will nothave that so it has been hard for them to grow," Deputy FinanceMinister Mary Jervase Yak told Reuters.

Title deeds are only available in Juba, an official said.

One way to expand the reach of banking services would be toimport mobile phone banking technology, such as Kenya's M-Pesapayments system. But some politicians fear the rush of new banksinto South Sudan may be assisting capital flight.

"The money from the banks is not generated and used within,"said Paul Logale Jumi, chairman of the national assembly'scommittee on economy and finance. "We need to critically examineall these institutions."

For many in South Sudan, one of the continent's poorestnations, banking remains a remote prospect.

"In the rural areas, people keep their money under theirpillows, if they have any money at all," said the minister.

• Banking & Budgeting
• South Sudan