Rogue banks must be tamed – expert

November 14, 2011
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Lack of proper and stringent laws blamed for arbitrarily interest rate hikes/FILE

, NAIROBI, Kenya, Nov 14 – A research analyst is calling for tighter regulations in the local banking industry to help tame the ‘cartel-like’ behaviour exhibited by banks.

Ochieng Oloo, Managing Director of Think Business argued that this behaviour has been fuelled by lack of proper and stringent laws that have seen banks arbitrarily hike their interest rates even when there is no justification to do so.

It is these oligopolistic tendencies that have seen these institutions ‘arm-twist’ the Central Bank of Kenya (CBK) whenever they feel that their interests are not served.

“The sentiments that I have heard from some of the people in the sector is that there is some levels of dissatisfaction with the regulator in terms of how things have been handled,” Oloo said.

These negative sentiments came to fore when the Central Bank tried to rein in the devaluing shilling by taking measures that were designed to curb speculations which it believed then was responsible for the weakening currency.

CBK Governor Prof Njuguna Ndung’u threatened to take action against the banks that were profiteering from the weak local unit and also went ahead to cut them off by selling foreign exchange directly to the importers.

The move is said to have irked banks which proceeded to hold on to their forex covers instead of releasing them to the market, hence contributing to the weakening shilling.

Last month, there was the directive for banks to slash by half their forex holding position, a move that did not endear CBK to the industry as they felt that the regulator as employing ‘dictatorial’ tactics.

This ‘bad blood’ between the two parties was only mended but just barely when the Finance Minister Uhuru Kenyatta stepped in and suggested dialogue as a way forward.

“I think there is need for more dialogue between the CBK and the banks. If we do not get that done, we are heading into bigger problems,” Oloo suggested adding that this was the only way to reach consensus and determine which areas need to be addressed.

Nevertheless, the analyst did hit out at banks for hiking their interest rates saying the move is self serving.

Banks have been reviewing their base lending rates with most of them quoting theirs at more than 24 percent, citing the increase in the Central Bank Rate which has gone up by nine percent in the last one month.

“If you ask me, I’d say it is reckless pursuit of profits by some of the banks. They know to some extent that the economy is growing and so they are pinning their hopes on that,” he faulted.

Further, there is a possibility that they are also eyeing the financing of the war in Somalia with the expectation that if the offensive is being financed locally, then soon enough, the government will run out of funds to run their operations.

Should this happen, Oloo reckoned that the first option would be for the government to raise money through the Treasury Bills and Bonds, in which case banks would cash in.

But while they seem to be taking a gamble, the flip side is that should this trend (of rising interest rates) continues, the analyst warned that it spells doom for the industry, which might start witnessing major defaults and growing Non Performing Loan (NPL) portfolios and possibility a collapse of some banks.

“The consequence is that later, we will start seeing some banks starting to fail because if they are not able to manage their NPLs, it will get to their point where they will not be able to manage their affairs

Over the last few years, borrowers have been diligently repaying their loans and this was reflected in reducing NPL which in 2010 stood at 6.2 percent.

This also mirrored a sound and stable banking industry supported by an enabling legal and regulatory environment as well as the robust risk management frameworks adopted by banks.

The picture however is not so rosy should the regime continue. Small banks, whose capital bases are not so strong, are particularly vulnerable.

With the failure of such institutions which particularly bank Small and Medium Enterprises as well as budding entrepreneurs, the consequences would be far reaching.

And so besides dialogue, there are those advocating for government controls to be implemented in the industry to curtail the blatant pursuit of profits at whatever cost.

Businessman Chris Kirubi argued for that a return of the Central Bank of Kenya (Amendment) Act 2001 popularly referred to as ‘Donde Bill’ which among other recommendations rooted for the capping of interest rates.

He felt that banks have abused their self-regulation freedom and now need to be contained.

“Banks are competing with each other on who makes the most billions (of shillings). I feel that we need the ‘Donde’ Act more than ever before. No bank should make more than 25 percent of their turnovers,” the business mogul opined.

If the situation is not stemmed, he painted a gloomy picture of not only collapsing businesses but a tattered economy that will have social, political and economic repercussions.

“There is no freedom without responsibility. They are threatening the economy and the security of this nation. For example, if we find all the thousands of youth who work in the construction industry being jobless overnight, who will feed them?” he posed.

“These are people with families. They walk to work and back and all of a sudden that income stream dries up, what will happen to our country,” he wondered.

Given the risks that this move portends, Kirubi challenged the government to take a decisive action to contain the situation and suggested a roundtable meeting to workout solutions that can be implemented.

While appreciating that demand and supply forces should ideally determine the prices in a liberalised market, he was of the opinion that the government too has a responsibility of protecting its citizens from exploitation.

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