Banks feel the heat as CBK boss tightens regulations

He baffled many when he appeared before a parliamentary vetting committee and revealed that he has no property in Kenya nor a wife at the age of 54. He astounded Kenyans even further when he refused the trappings and frills associated with his posh office.

What also captured the attention of Kenyans during the vetting was his impressive CV. Dr Patrick Njoroge beat his rivals by miles to clinch the hot seat that’s the governor of the Central Bank of Kenya (CBK).

IMPRESSIVE CREDENTIALS

He is Yale-educated and was adviser to the deputy managing director of the International Monetary Fund, where he had worked for many years. With unmatched credentials, Dr Njoroge looked like he was equal to the onerous task of straightening the rough edges in the financial regulatory terrain.

And indeed barely a year into his appointment, he is living up to the billing, causing ripples in the financial sector in an unprecedented way.

For a long time, the CBK has borne the brunt of criticism from legislators, the media and the public primarily for its inability to tame sky-high interest rates. Such criticism was loudest in 2012, when a House select committee was formed to probe the decline of the Kenya shilling by the 10th Parliament.

CBK FAILURES

The committee, chaired by Adan Keynan, upbraided the CBK for “institutional and human failures” asserting that “indecisiveness and inaction of the CBK, had led to speculative activities of some banks and individuals”.

Former CBK governor Njuguna Ndung’u came under scathing attack, with the MPs accusing him of presiding over a number of dubious activities that had led to the weakening of the shilling.

The questionable dealings cited included the creation of opportunities for arbitrage, failing to detect and arrest speculative activities, unclear communication to financial markets, and ineffectiveness of the Monetary Policy Committee (MPC) as well as inadequate policy responses and belated intervention by the CBK.

NEW BOLDNESS

Perhaps taking note of this turbulent past that his predecessors wrestled with, Dr Njoroge has wasted no time in enhancing the CBK’s supervisory vigilance, tightening regulatory nuts and underscoring the importance of market discipline.

In extensive interviews with policy experts, economists, bankers and academicians, Smart Company established that the new governor is charting an unbeaten path for the regulator. Apparently, his principal objective is making a complete break from the past when the regulator was the favourite punching bag whenever the economy plunged into headwinds.

“From a policy standpoint the new governor is likely to be compliance-focused as opposed to Prof Ndung’u who was growth-focused,” said a CEO of a bank who sought anonymity, citing the sensitivity of the matter.

“Prof Ndung’u can be credited with allowing rapid expansion of banking beyond the hallowed confines of banking halls to the street.”

Prof Ndung’u, the CEO added, not only allowed but actively promoted banking on mobile, and aggressively pushed banks to adopt agency banking, which opened the doors for many Kenyans to access formal financial services, making Kenya a global leader in financial inclusion.

COMPLIANCE

“But unlike his predecessor, Dr Njoroge is seen as not keen on focusing on ‘expanding the pie’,” said the CEO.

Experts point out that perhaps the clearest sign yet that Dr Njoroge is keen on cleaning up the banking sector with a brand-new broom is the speed with which he spearheaded efforts to deal with the mess at Imperial Bank following the death of its founder owner. Massive irregularities have been unearthed at the bank .

“It is clear he is more open in exposing any irregularities in the sector to the public, as opposed to previous regime when disciplinary actions were executed confidentially, mainly to protect banks from customer anxiety,” said another CEO of a leading a local bank who also sought anonymity.

IMPERIAL BANK CRISIS

Last week at the height of the Imperial Bank crisis, Dr Njoroge did not shy away from admitting the messy goings-on. He was, however, quick to assure depositors that the regulator was “on top of things”.

Smart Company has learnt that some players within the banking sector have been ruffled by the expeditious twin moves to put both Imperial Bank and Dubai Bank under its management, with some saying the CBK should have been more “quiet” and not “showy” in addressing the matter.

Dr Njoroge is, however, unperturbed by the criticisms swirling about over his Imperial action: “The move has been carried out in the interest of depositors, creditors and members of the public,” he said as he announced last week that the regulator had appointed the Kenya Deposit Insurance Corporation (KDIC) as the manager for the lender for 12 months.

CBK 2015 BILL

It is expected that proposed laws to review the current CBK Act contained in the CBK 2015 Bill, which is set for parliamentary debate, would go a long way in strengthening the regulator’s supervisory role. This will even hand the governor fresh rounds of ammunition to rid the sector of improprieties.

“He is clearly focusing on ‘cleaning-up’ and compliance to global best practice in the industry,” said a source at CBK who sought anonymity.

Although Dr Njoroge’s approach has received accolades for some of the bold measures he has quickly implemented, there are murmurs of discontent too.

SMALL BANKS

For instance, Dr Njoroge’s move to oppose the increase in banks' minimum capital to Sh5 billion, on the basis that small banks are necessary for financial inclusion, has not endeared him to the big banks, which say his decision betrays his lack of understanding on the complexities of Kenya’s banking sector. The governor, they say, assumes “small banks are good for small customers as opposed to big banks which cater for big customers”.

“The big banks have become big because of banking the small customer e.g. Equity, Coop, KCB. Indeed it’s the deliberate financial inclusion drive of the three banks — that entailed opening accounts for the poorest Kenyans through mobile and agencies — that have made them the biggest banks. Some of these customers are too small even for the smallest (tier 4) banks,” said a tier-one bank CEO, who also sought anonymity.

“I hope the Dubai Bank and now Imperial Bank saga will help awaken the new governor to the truth that a big bank that has diversified shareholding and client base is far more likely to be run better than a small family-controlled bank that relies on community, ethnic or religious enclaves to get business.”

GOVERNMENT MEDDLING

Many are also waiting to see how Dr Njoroge will deal with the government, which in the past has been accused of meddling in the affairs of the regulator. Experts say that having been hired through a competitive process, the new governor is likely to be firm when dealing with the government and the Treasury.

“Indeed its rumoured the current cash crunch is partly as a result of the governor’s refusal to allow government to take an overdraft from CBK, as it had already breached its limits,” said a highly placed government official.

A senior Treasury official said being unmarried (by choice), of great modesty and temperance, he is unlikely to be compromised through sweetened deals that have been the bane of top leaders and managers. Nairobi-based financial analyst Aly Khan says behind the soft demeanour of Dr Njoroge lies a man of steel.

MAN OF STEEL

“I am impressed by the Central Banker. He is playing a very difficult hand (the fiscal side is out of time and tune with the new normal) with finesse but inside the velvet glove there is self-evidently an iron fist,” says Khan.

Khan said he knew Dr Njoroge would make a difference when he rejected the trappings of power and insisted on sticking to his simple lifestyle.

“The Central Banker caught my attention from the outset. Giving up the trappings of the office (the house in Muthaiga and the police escort) was a good signal,” adds Mr Khan.

Industry experts expect to see a change in many bank boards as Dr Njoroge moves to enforce prudential guidelines around integrity issues.

“Banks may begin suffering hefty fines in case they get involved in any irregularities,” said a government official.

“Soon, expect some friction with the new CBK board, which has a new chair, as they go about recruiting, promoting staff, procurement, etc, which the new governor is likely to question over integrity at every stage. Indeed the amendment of the CBK Act to introduce chair position was a huge mistake,” added the official.

There are those, like Gem MP Jakoyo Midiwo, who are of the opinion that the governor does not have the requisite mettle to take on the viscous cartels holding the financial sector to ransom.

“He has no capacity to take head-on the banking cartels. I really doubt he understands them,” the MP told Smart Company.

Mr Midiwo, who has been vocal against banking cartels in the country, says he is proposing a new law to address the deep-rooted menace.