Kenyan governor outlines three pillars for ‘new normal’ in banking

The Central Bank of Kenya wants to usher in a "new normal" in the country's banking sector, built on three "key pillars", its governor said in its latest annual report on the area, published on August 2.

The three pillars revolve around greater transparency, stronger governance and "effective" business models, Patrick Njoroge said. These would "underpin the emergence of a stronger, resilient banking sector", he said.

The governor said 2016 would be a year of "transition" for the central bank, "seizing the lessons and challenges" of the previous year, when the central bank placed two banks – Dubai Bank and Imperial Bank – under receivership. The former was later liquidated.

Speaking in November, a central bank spokesperson told Central Banking "the failure of these two banks" had "highlighted the urgency of enhancing bank supervision in Kenya".

Dubai Bank Kenya was placed in receivership on August 14, 2015 after it began breaching its daily cash reserve ratio requirements. It was subsequently found to be experiencing serious liquidity and capital deficiencies, leading to concerns it would not be able to meet its financial obligations. The bank was liquidated on August 24.

"Unsafe or unsound business practices" were cited when Imperial Bank went into receivership on October 13. Njoroge announced in December that Imperial Bank directors had failed to co-operate with the central bank on the reopening of the bank, as they had refused to deposit 10 billion shillings as the first step to reviving the lender.

The central bank's actions were "necessitated by unique circumstances in each of these banks", said Njoroge in yesterday's report. Following these incidents, the central bank "commenced efforts to upgrade its supervisory regime and human resource capabilities", the report said.

External auditors were required to expand their remit, conducting additional assessments into the reliability of banks' information, communication and technology systems.

Banks were also given the opportunity to "review their business models and consolidate the operations" following the central bank's decision to issue a temporary moratorium on the licensing of new banks in November 2015, the report said.

"Ushering" in this new normal in the banking sector, the governor said, would require "greater transparency" supported by accurate data. Stronger governance with regard to responsibilities, accountability and fair market conduct would also be needed.

"This will in turn support Kenya's aspiration of being an international financial centre," Njoroge said.