Rotich, losing sleep over number of small banks is the wrong headache

Opinion and Analysis

The Central Bank of Kenya headquarters: When smaller banks fail, they cannot cause widespread damage. PHOTO | SALATON NJAU 

By MOHAMMED WEHLIYE

This year’s reading of the Budget by Treasury secretary Henry Rotich must have been quite a hectic one for some of the country’s bankers.

He dropped a bombshell that the Kenyan banking system is ripe for change and that change would be on a fast-track over the next 36 months and take a toll on at least 22 banks, their owners and senior executives.

Mr Rotich’s proposal is to increase minimum core capital base of the commercial banks by 400 per cent from Sh1 billion to Sh5 billion.

Core capital is not a big issue with the tier-one and tier-two banks , however all but one of the tier three banks would need to raise at least Sh66 billion of new core capital in the next three years if the minister has his way.

It is important to note that the proposal to increase minimum core capital is not meant to address immediate financial stability concerns.

Kenyan banks, across tiers, are fairly well capitalised with average total and core capital ratios of more than 19 per cent and 16 per cent respectively. The minimum required total capital adequacy ratio is currently at eight per cent.

So if the system is healthy and isn’t broken, why fix it? Well, it looks like this move is intended to spur on a government-induced consolidation of the country’s overcrowded banking sector; mainly through encouraging mergers and acquisitions.

The government’s underlying logic is that institutional framework would be strengthened and banks would become stronger and successful domestic and regional players if they are few and big.

Some industry commentators have supported this position although the incoming CBK governor Patrick Njoroge had reservations during vetting.

No doubt we have more banks than most countries in the region but, is that a good or a bad thing? Last week, highly respected finance industry commentator, Jaindi Kisero, wrote an opinion piece ‘Dr Njoroge, small banks have no niche clients’ in this newspaper, arguing that the country’s small many banks are of little value and are a risk to the system as a whole.

Mr Kisero says it is a bad thing to have many small banks on the grounds that they “operate more or less like dukas but continue to pose systemic risks to the financial system”.

Dr Njoroge’s opposite view makes Mr Kisero doubt whether he is indeed “the right man for the important job of the CBK governor”.

Do smaller banks pose a systemic risk? All banks can but the idea that somehow smaller ones pose bigger systemic risk than the big banks is simply absurd.

As a matter of pure logic, a financial system reliant on a few banks that are regarded too big to fail and as such are implicitly government-guaranteed is less secure and more prone to moral hazards than one based on a large number of smaller banks, which can fail without causing widespread damage.

Considering that a mere handful of our banks have about half of the country’s personal and commercial bank deposits, that is scary.