Three locally owned banks have faced distress in the recent past. The question as to whether or not the economy has too many banks for the number of customers, still lingers. It is probable that the economy is over banked. In this case, it is expected some of the smaller banks would merge, be acquired by bigger banks, or risk being pushed out of the market all together.
There are about 43 licensed commercial banks. Twenty five of those are locally controlled, 15 foreign controlled, and three are government owned. Incidentally, all the three banks facing distress are locally controlled. Thankfully, the three banks were not individually considered systematic in the sense that the problems did not spill over to other banks. But it did send shockwaves in the market and the threat to smaller banks was real. The Central Bank of Kenya had to set up a liquidity support programme to prevent further casualties.
Going forward, lessons learnt ought to guide the way banks are regulated and the way the business of banking is conducted. The CBK has identified three pillars towards a stronger and more resilient banking sector.
One, and very key, is the need for greater transparency which is supported by accurate data. Information coming out of the recent crisis is that transparency suffered, both on the side of the regulator and the banks. With the benefit of hindsight, regulatory forbearance appears to have taken a stretch. It is likely less an issue of supervisory incompetence, but rather the case of a fully briefed regulator deciding not to intervene. Whereas there could have been legitimate reasons for non-intervention, an earlier intervention could have lessened the issues that have now arisen from the crisis. The lesson learnt is that the regulator ought to be capable and willing to take tough interventionist actions. Such difficult decisions will require the backing of the financial services community, the political establishment, and to some extent, public understanding.
The second pillar is stronger governance with clear demarcation of responsibilities, greater accountability, fair market conduct and stronger supervision to promote careful decision-taking. The trading of blame between the directors, management, shareholders and even regulators and auditors has left everyone unwilling to be held accountable.
The third and final pillar is effective business models, aimed at strengthening the resilience of banks, reducing costs and supporting innovation. The sector is facing technological transformation, new regulation, and a more informed customer. The need to innovate is no longer about profitability, it is about survival.
Karen Kandie is a financial and risk consultant with First Trident