* 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
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 to fit a partition and grill, the basic requirement to open KBC's first branch.
That was in 2005. KCB now has 21 branches in South Sudan generating 9 percent of the group's 15.2 billion Kenyan shillings ($175 million) in pretax profit for the first nine months of 2013.
The scope for banking expansion in Africa looks vast. Barely a quarter of Sub-Saharan Africans have a bank account, according to World Bank figures. In most rural areas of South Sudan, a nation of 11 million people, there is no banking at all.
But what KCB's profit breakdown does not reveal is the hurdles to setting up an operation in a frontier market like South Sudan, a nation born in 2011 when it split away from Sudan to the north.
"There is a lot of opportunity," said Francis Mwangi, a banking analyst at Nairobi-based Standard Investment.
But with South Sudan ranked 186th of 189 nations in the World Bank's ease of doing business survey, Mwangi said: "You have to be thick-skinned to enter some of these markets."
Running a bank in the young nation means finding scarce foreign exchange, accepting limited regulatory protection, hiring skilled workers where most people have never been to school and finding a sturdy enough building to house a branch.
That was the one of first challenges for Oduor-Otieno, who was KCB's deputy chief executive when he visited in 2005 and stayed in a hotel made of tents pitched beside the Nile.
"They erected my tent as I watched," said Oduor-Otieno, who rose to become KCB's chief executive before moving to Deloitte.
He and five other KCB executives were pioneers, visiting in 2005 just months after leaders in what was then the southern region of Sudan signed a deal to end two decades of civil war.
"If you look at banks, there was literally nothing on the ground 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 still almost no tarmac roads in a nation the size of France.
That has not stopped KCB opening branches in all 10 of the nation's states - the only bank with such reach - and competition is mounting.
"The demand is enormous and the banks are just mushrooming," said Zahia Lolila, coordinator for advisory services at the World Bank's International Finance Corporation (IFC) in Juba.
The central bank, built out of a branch of the former headquarters in Sudan's capital Khartoum, is "full of ambition", Lolila said.
But "you're building an institution from zero. You don't have bank supervisors. Facilities, equipment, computers, management information systems - everything has to be built from scratch." That includes applying for a SWIFT code for the central bank - a basic requirement for banking transactions.
Then there is the literacy rate: 40 percent for men and just 16 percent for women. The government demands that most staff in any bank must be locals.
VITAL OIL FLOWS
"Experienced staff, experienced bankers, experienced in any area, there are (only) a few," said Willis Osir, managing director of the Co-operative Bank of South Sudan, seated in a gleaming, four-storey building in one of the few areas where buildings boast more than a ground floor.
Osir said his bank, a venture between Kenya's Co-operative Bank and South Sudan's government that opened this year, has a training programme which sends young locals to learn the trade in Kenya, east Africa's economic powerhouse.
Foreign currency is another headache. When a political spat between South Sudan and Sudan led to a 15-month shutdown of an oil export pipeline running through Sudan's territory, the flow of dollars dried up.
"They (the government) have one sole source of foreign currencies - that is oil," said Osman Ahmed Osman, deputy general manager of South Sudan Commercial Bank.
Oil exports resumed in April. But securing enough hard currency day-to-day for clients is still not easy.
"We have enough to keep going, just to cover the basic needs of our customers," Osman said.
Most of the business is still just deposits and cash withdrawals. Lending is a challenge when few can offer collateral, such as title deeds. "Most small businesses will not have that so it has been hard for them to grow," Deputy Finance Minister 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 to import mobile phone banking technology, such as Kenya's M-Pesa payments system. But some politicians fear the rush of new banks into 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's committee on economy and finance. "We need to critically examine all these institutions."
For many in South Sudan, one of the continent's poorest nations, banking remains a remote prospect.
"In the rural areas, people keep their money under their pillows, if they have any money at all," said the minister.