This archive report was first published on 14 July 2019.
CBK Governor's Second Term Must Save Stressed Firms ¶
As Central Bank Governor Patrick Njoroge settles in for a new term, he faces a pressing challenge: saving stressed banks from extinction. More than 10 local banks in Kenya are struggling to meet Central Bank of Kenya's high thresholds for operation, leading to a potential concentration of assets in a few institutions.
The country's banking sector is facing a crisis, with banks losing customers to bigger players and struggling to offer loans at the capped interest rate of 13 per cent. To address this, the Central Bank needs to tweak its rules to give Kenyans a menu of lenders rather than just a few humongous players.
According to a strategic adviser on risk management, the biggest current blocks to funding the SME and retail sector are liquidity, distribution channels, and risk-bearing capital. The governor can consider changes to kick-start letting banks with edgier shareholders, innovative managers, or special clients remake the economy.
One of the key initiatives would be creating Segment One (Sh75 billion and up in assets) and Segment Two banks. The latter could reasonably rely on reputation and the robustness of their product and benefit from loosened regulation in ways including expedited product approvals and launches, reduced capital costs, and restructured NPL management rules.
However, these lowered thresholds would have a cost: Segment Two banks would no longer be covered by deposit insurance and must participate in the interbank market only through a Segment One peer willing to act as a private sub-regulator.
The Central Bank needs a strategy to foster the creation of funds that could lubricate the buying and selling of loan books, deepening the derivatives market, and bridging capital markets issuance through securitisation.
Ultimately, a deeper, broader, smarter, and nimble banking sector would be a legacy worth leaving when Njoroge moves on.
