No sudden closure of troubled banks as MPs pass Finance Bill

Central Bank of Kenya Governor Patrick Njoroge speaks during a media briefing on July 26, 2016. Lawmakers have passed a law that requires Dr Njoroge to consult the Treasury Cabinet secretary before closing any troubled bank. FILE PHOTO | SALATON NJAU |

What you need to know:

  • The decision to allow the CS a role in deciding whether a bank is to be shut and put under receivership was made because of the economic impact such closures have had in the past.
  • The change to the law could, however, be criticised or challenged in court on the basis that it erodes the independence of the Central Bank as an impartial body.

The Central Bank governor will now have to consult the Treasury Cabinet secretary before deciding whether a bank should be closed and put under receivership, according to changes to the law approved by MPs.

Lawmakers acceded to the Treasury’s proposed change to the Banking Act and the Kenya Deposit Insurance Act as they approved the Finance Bill, which now awaits the President’s signature.

Finance, Trade and Planning Committee chairman Benjamin Lang’at said the decision to allow the minister a role in deciding whether a bank is to be shut and put under receivership was made because of the economic impact such closures have had in the past.

Initially, the committee was of the view that allowing the secretary some leeway would erode the independence of the Central Bank in the regulation of banks.

“But later on, we had discussions where it became clear that before you decide that a bank should be closed, you have to at least inform other players in the sector and with the CS being in charge of the economic affairs of the country, he ought to at least get to know so that you don’t surprise the government,” said Mr Lang’at.

CENTRAL BANK INDEPENDENCE

He said consultations would offer an opportunity for more options to be put on the table before a drastic measure is taken.

“Consultation is very good, especially on very critical sectors. When anything happens, like it happened with the three banks, it destabilises the economy and the people who will explain will be the President and the CS and if you are not aware, you can’t really explain this,” said Mr Lang’at.

The change to the law could, however, be criticised or challenged in court on the basis that it erodes the independence of the Central Bank as an impartial body.

The Treasury asked MPs to amend the law as a response to the sudden closure of Dubai Bank, Imperial Bank and Chase Bank since Patrick Njoroge took the helm of the Central Bank.

The closure of Chase Bank, where the Treasury had Sh200 million, was particularly dramatic. Dr Njoroge had a meeting at the Central Bank with Chase's main shareholders that lasted until 4am on the morning of the day it was put under receivership.

He would famously say at a press conference: “By the end of the day, we realised that the haemorrhage was getting out of hand. We sat late into the night as we sought to find cash to plug the gap.

"But we were unsuccessful. It was only at 4am this morning that we made the decision to close the bank.”

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