By Anzetse Were
Kenya’s most recent story in the banking sector from a development point of view was how it expanded financial inclusion offering credit lines to a segment of the population that had previously been considered ‘unbankable’. Able to access credit from banks oriented to the low income population and SMEs, many Kenyans found themselves able to use the credit offered to improve their standards of living. However, as we are seeing, perhaps the push for financial inclusion compromised other elements required for a robust and stable banking sector from an ethics and corporate governance point of view. Did the previous push for financial inclusion lead to unintended laxity on the corporate governance element of Kenya’s banking industry?
This question is precisely why the recalibration of the banking sector in Kenya is a positive development in terms of the determination the Central Bank has clearly communicated to ensure all banks adhere to all regulations, stipulations and high quality corporate governance principles. This ongoing correction while painful at the moment, will ensure the sector comes out more robust and with stronger structural integrity. In many ways the order of events has been serendipitous in that this period of realignment to better practices in corporate governance was preceded by a period of financial inclusion. Now, more than ever, one can see that it is truly the common Kenyan that was at risk when dubious practices by some banks were allowed to proceed unchecked. Indeed, because it is small businesses and, low and average income Kenyans who are being affected by the current banks under question, there is great moral impetus to ensure that Kenyans who scraped their savings together, are protected from any vagrancy in poor corporate governance. Thus it is crucial that the sector undergo scrutiny so that any existing laxity is corrected.
Bear in mind that Kenya is not unique in terms of the questions being targeted at the banking sector. The Global Financial Crisis (GFC) in 2007-08, from which the global economy has yet to recover, was informed by dubious practices in the global financial sector. Indeed, a Governor of the Central Bank of Bosnia and Herzegovina made the point that the GFC proved that the principle of responsible finance had not been sufficiently developed with banks and with clients and that the non-transparent and ambiguous lending practices put many customers at risk. Indeed the GFC catalysed a reanalysis of bank governance with a view to improve bank governance particularly in South East Europe (SEE).
Thus given the current point of development of Kenya’s economy and banking sector, the clear and much needed direction from the Governor of the Central Bank to ensure that the state of ethics and practices in corporate governance of the banking sector in Kenya are robust, is ahead of its time and should be applauded. And it is crucial that as this recalibration occurs, that depositors are protected, a fact of which the CBK seems keenly aware. Further, while the banking sector in Kenya is still viewed as largely stable, even the IFC acknowledges that shortcomings in bank corporate governance can destabilize the financial system and create systemic risks to the economy. Thus, the current dynamics may be the needed corrections required to ensure Kenya’s economic development is based on a solid foundation of a financial sector with integrity.
As senior counsel from the European Bank for Reconstruction and Development (EBRD) stated, banks are in a unique position to influence the corporate governance of their corporate borrowers and can become role models for other companies in implementing high standards and best practices. In this spirit, the EBRD organised a two day workshop aimed at improving the transparency and accountability of the SEE financial sector back in 2009. Perhaps Kenya should follow suit.
This article first appeared in my weekly column with the Business Daily on April 17, 2016