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The dawn of a new normal with CBK governor

The elusive Kenyan economist, Dr Patrick Njoroge, joined the CBK from a varied career at the International Monetary Fund spanning 20years based in Washington, DC. Prior to his appointment as Governor, Dr Njoroge was the advisor to the IMF Deputy Managing Director where his responsibility included assisting in overseeing IMF’s engagement with a large sway of IMF members.

Before joining the ImF, Dr Njoroge worked as an economist in the ministry of Finance and was a planning officer in the ministry of Planning. he holds a PhD from Yale University, a masters and Bachelor of arts degree in economics from the University of Nairobi.

his impeccable credentials aside, the manner in which he conducts both his I am sure if you look at   it from this angle; you would be encouraged because for the first time in a long time, our banks can truly carry out banking business without trying to push up lending rates to hide some of the losses they are making. In a sense we are in a much better place.

Towards the end of 2015, Dr Njoroge had cleaned up the bank- ing sector and stabilized the econ- omy recording a 5.6% growth rate. Granted that it was a tough year with a myriad of challenges and also considering that the global economic growth was a mere 3.2%, this was a remarkable achievement on his part. as I look around the rest of africa today, I notice currencies fall- ing, interest rates sky rocketing etc. however, the volatility of the shilling is the lowest I have ever seen. Basically, a lot of this has got to do with the credibility of Dr Njoroge, and the faith that markets have in him.

It is in recognition of this that in October 2016; Dr Njoroge was presented with the Global markets central Bank Governor of the Year award for Sub-Saharan africa.

This is the second award accord- ed to him given the little time he has been at the helm of the cBK. In may 2016, he received the central Bank Governor of the Year award at an african  Development Bank

(aFDB conference.

Global markets said the gover- nor was feted for his efforts to curb inflation, cleaning-up the banking sector and his drive to pursue a new policy of openness and transparency. he was also commended for his admirable stewardship of Kenya’s financial sector and vocal  support

for innovation in the industry.


The new normal

I believe one of our most significant milestones is that we have now real- ized that in the new world, lenders will be punished brutally not only by the regulator but more so by deposi- tors and markets for missteps.

Dr Njoroge took the challenges he encountered as an opportunity to tip into what he calls the new nor- mal and anchorthe banks on a firm foundation.

You could think of it in the fol- lowing way; when the global finan- cial crisis hit markets in the UK, Europe and US; there was a need for a reset. Issues that in the past were not common to banking suddenly came in front and centre.

For instance, 20 years ago, talking about ethics of banking was sort of an oxymoron but now we see market discipline as being a very integral part of banking worldwide.

The same thing has happened in Kenya, we have had a reset.

according to the governor the new normal has three pillars. The first is Transparency – a lot of impor- tance is now being placed on this. Balance sheets need to be accurate and other things such as lending to directors will now have to be revealed not just to boards but also to depositors and shareholders as a standard procedure.

matters such as ownership struc- ture of banks will also have to be made public. Depositors need to know the cascade of responsibility, so that they can put a face to whom they are entrusting their money to.

cBK has made several attempts to address this issue. recently, the regulator asked all lenders to dis- close their top five shareholders while disclosing intentions to cap the tenures of external auditors and chief executives. The second pillar is stronger governance from sharehold- ers, board, management and staff; which also calls for stronger supervi- sion from the cBK.

Dr Njoroge has come out strong on weak corporate governance which has long been viewed as the achilles heel of Kenya’s banking sector. Lack of strong corporate gov- ernance structures has been cited as one of the key contributors to recent bank failure.

moreover, the cBK moved to issue risk-based supervision last December under the Internal capital adequacyassessment Process (IcaaP) guidelines. Starting this april, corporate governance will  be one of the factors determining capital to be held by a bank.Each bank will be required to hold capital consistent with its risk profile and business strategy. currently, banks irrespective of size and target market are required to hold the same core capital and maintain quantitative ratios which do not factor in issues such as internal management, stress testing, and operating environment.

Under these new guidelines, we are likely to witness stronger internal governance systems, proper organi- zation of institutions’ businesses and also a positive shift in how banks allocate capital against risk.

The cBK has also embarked on other prudential guidelines that will help in its regulatory mandate of Kenyan banks. This includes a closer IcT system audit to detect and miti- gate fraud cases well in advance. The third pillar is better business models. This is in recognition that banks can be lazy just like everyone else and copy what others are doing. Banks need to individually  figure out their comparative advantage, this does not refer to a niche – it has to be something that is much more fundamental.

Banks need to assess the value they are adding to their niche. Kenya needs banks that are more resilient, stronger, vibrant, ready to do busi- ness, more cost effective and innova- tive; with those that do not meet this criterion exiting the market. This is the new normal!

although Dr Njoroge has been challenged legally, he has vowed that he will not shrink from his responsi- bility to protect depositors and the financial system. This pushes him forward to deal with issues without fear or favour.

When thinking of the Governor, I am reminded of George Orwell’s quote ‘In the days of universal deceit, telling the truth is a revolutionary act’. What the Governor is doing is his job, nothing extraordinary. But in a country that is notorious for graft, a man like him is a national treasure to be jealously guarded and supported.

The article has been contributed by: Martin Dias, CEO-FAPCL GROUP md@ fapcl.com