Is the banking sector in Kenya on trial? The jury is still out. This is not because all the banks are not playing fast and loose but as recently evidenced, some may not be following the set ground rules.
Anyone with a basic knowledge of bank operations and management will tell you that banks’ main “stock-in trade” is trust. A depositor walks into a commercial bank with savings; this action is all based on trust. When that confidence is abused the consequences can be dire not just from the specific bank but to the entire banking sector.
The story goes that Julius Caesar divorced his wife, Pompeia, allegedly because of rumours about her behaviour. When Pompeia was put on trial, Caesar said he knew nothing about his wife’s rumoured philandering, but declared that he divorced her because his wife must never be under any splash of suspicion. The same applies to a banker: To a customer or depositor, his or her bank must never be under even a shadow of suspicion.
The moment customers start doubting their bank, they vote with their feet and a run on the bank can result.
In an article published at the beginning of the year, I argued that African banks need to take the issue of depositors’ insurance seriously. If Africa is to grow we must get our banking right.
No well-structured economy will grow when it is claimed that “75 per cent of sub-Saharan adults” do not yet have a bank account. Of course, there are many reasons why so many Africans remain unbanked but lack of confidence in our banking systems is key among them. Deposit insurance cover has been used in developed countries to shore up customer confidence. Deposit insurance concept was mooted in the US after the Great Depression.
The economic turmoil that hit the financial markets led to massive panic withdrawals from banks; most came crashing down. The government had to react to bring customers back to the banking halls. The answer was deposit protection for customers.
Kenya and indeed most of the East African countries have deposit protection policies. The question is how effective they are.
The European Parliament in 1994 passed a legislation requiring all member states to have deposit insurance for at least 90 per cent of the deposited amount with a minimum of least €20,000 ($21,978) per depositor.
In the US, the 2008 global financial crisis caused the figure readjusted to at least €50,000(54,946) per depositor, this was later increased to $250,000.
Most EU countries increased their limits. Germany, France, Finland, Belgium etc. have enhanced their insurance limits to €100,000 ($109,892). China, in November 2014, proposed that every depositor be insured to the tune of 500,000 yuan ($81,300). While Kenya may not match what these economies have achieved over years, continuous measures to improve the position are necessary.
In Kenya, the CBK stipulates that banks contribute a percentage of their total deposit liabilities based on a risk-adjusted contribution methodology.
It further advises that a flat rate of 0.15 per cent be applied to the deposits held by a member institution with a minimum of Ksh300,000 ($2,890). Rwanda is in the process of setting up such an arrangement while Uganda and Tanzania have set one up already. The question is how much is sufficient to ensure depositors feel comfortable banking their savings.
Deposit insurance will never be the panacea to the problems in the banking sector. The regulator must step up the regulation of these financial institutions. CBK has indicated there was laxity as far as regulation was concerned for some of these wayward banks. Better regulatory tools coupled with both regular on-site and off-site inspections are needed.
Financial institutions that do not play by the rules must be reprimanded and those that are compliant need recognition.
If CBK would even publish some of this information, it would build a lot of confidence among would-be depositors. Inspections should go beyond checking on the quantitative aspects of performance. The devil lies in what is unquantifiable — the corporate governance structures need be rock solid.
Financial institutions must be encouraged to invest in robust enterprise risk management frameworks. History and experience demonstrate that financial institutions that fully implement serious ERM systems are able to detect some of these challenges and risks even before a regulator steps in.
Macharia Kihuro is a financial risk practitioner based in Nairobi, Kenya. [email protected]