What measures are being considered to further promote stability in the banking sector?
PATRICK NJOROGE: The first point is that it is not just laws and regulations that strengthen the banking sector. Laws and regulations are important for giving a strong framework that is aligned with international best practices, but we discovered that our weakness was not so much in the framework as in its implementation. Most of what we have done over the past six months, as well as what we will continue to do for the rest of the year, is aimed at implementation. The past three months have particularly been a tipping point towards the “new normal”.
This new normal has three pillars: transparency, governance and more effective business models. Transparency means that financials are done correctly, and accurate company information is reported with regularity. Governance refers to a cascade of good governance from shareholders to directors to managers, with each party bearing some responsibility. Lastly, banks need to figure out how to alter their business models to further increase resilience. This may result in some consolidation, but should also definitely result in innovation in the sector.
What factors would you say pose the biggest risks to the banking sector?
NJOROGE: The CBK has emphasised that the factors leading to the receivership of three banks Dubai Bank, Imperial Bank, and Chase Bank – are not at all systemic. These three have faced issues of fraud, money laundering and poor business practices. It suffices to say that Imperial Bank was an exception in many ways, and is a high-water mark in Kenya’s history of financial crime. The use of IT systems to execute deception was a unique event. Alternatively, Chase Bank had a very interesting “DNA”, given its high level of connectivity to the small and medium-sized enterprise (SME) sector. In that case, we have had to carve out certain areas, and we are resuscitating the bank, which is a first in Kenya.
At the end of the day, we work to protect depositors, creditors and the financial system. This protective role is why we placed the institutions into receivership. Ultimately, the difference in how we approached the challenges with these banks shows the idiosyncratic nature of their situations.
There is an underlying narrative of governance and transparency challenges, but our “new normal” framework is addressing that. The current steps of enforcement being taken will also set a precedent to discourage malfeasance in the future. Because of the global financial crisis there was this concept that the banking sector was capable of self-regulation. Since then, we have globally moved towards ethics, market discipline and a reset of regulations as key features of modern banking.
How will financial innovation play a role in Kenya’s future development?
NJOROGE: Innovations in mobile phone financial services have allowed for a 75.3% financial inclusion, one of the highest in Africa. Innovation will likely come from the intersection of ICT and financial services as it has in the past, but we need to take this beyond simple transfers. Kenya is about to introduce the M-Akiba mobile bond in which a rural Kenyan can participate for $30. Savings vehicles like this could be transformative for low-income populations.
There are many platforms and incubators which could also bear fruit in innovative forms. It is also important we have innovators that help us move away from standard lending models and products to accommodate income volatility challenges among the lower income segment. This type of innovation is essential for SME growth and can be done.
Innovation has also presented challenges. The run on Chase Bank was bred on social media. Rather than seeing long lines at brick-and-mortar branches, we instead saw depositors jump on their smartphones.
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