CBK’s suspension of new banking licences timely

The Central Bank of Kenya. The regulator must strengthen its supervisory and market surveillance roles. PHOTO | FILE 

By GEORGE BODO

Last week’s declaration by the Central Bank of Kenya (CBK) of a moratorium on licensing new banks was timely.

It was the first time since the liberalisation of Kenya’s banking sector that a formal declaration has been issued.

But it is not the first time such a declaration is being issued in East Africa. In 1997, following a spate of bank failures, the Bank of Uganda declared a decade-long moratorium on licensing of new banks. Following the lifting of the moratorium in 2007, 12 new commercial banks were licensed between 2008 and 2013.

But unlike the Bank of Uganda, there are striking circumstantial differences under which CBK has declared the moratorium.

First, there are no systemic failures; in fact, the recent failures of Dubai Bank and Imperial Bank were non-systemic, largely because of their relatively small sizes. Second, the level of industry-wide asset non-performance is not really out of control.

Compare that with the Bank of Uganda situation. At the time it declared the moratorium, industry asset non-performance levels, as measured by the ratio of non-perfoming loans (NPLs) to gross loans, were hovering between 26 per cent and 39 per cent, which was extremely high by any standards, and therefore there was an urgent need, at that time, to de-emphasise licensing new players and instead focus on bad debt recoveries.

This is not the case in Kenya at the moment. This declaration by the CBK could have been informed by the need to review the whole licensing framework, as part of the ongoing banking sector policy reforms, and especially the need to beef up and ring-fence the current pre-qualification procedures, which was long overdue.

We all know that the issue of bank licencing in Kenya, for a long time, has been very opaque. Some of the problems the banking sector is going through at the moment are partly traceable to the licencing gymnastics at the time of issuance. There could have been a number of licences that were signed off questionably.

It is recognisably and visibly difficult to reverse the process. However, declaring a moratorium is a strong pointer to the fact that the regulator is now keen on matching the rapid growth of banks over the last decade with a corresponding effective prudential regulation in order to avoid any further failures in the sector.

And it has been quite evident all over. A court ruling on Thursday last week summed it all up. A High Court Judge, Justice Eric Ogola, while suspending the dissolution of Dubai Bank for 60 days, charged at the CBK for, in the judge’s own words, sleeping on the job and a ploy by the regulator to cover its tracks and avoid blame for failing to act on breached regulations; which potentially exposes the regulator to suits.

With such rigour of verdicts, it is only imperative that the regulator re-emphasises strengthening of its supervisory and market surveillance capabilities first before allowing in new players.

Consequently, I see this moratorium being in place for some time and will likely affect all licence applications that had passed current pre-qualification procedures and whose licence recommendations had been approved. I don’t think anyone whose application had been pre-approved will likely open shop any time soon.

Additionally, any deposit-taking micro-finance institution that had disclosed medium-term plans to convert into fully-fledged commercial banks will now have to wait longer.

Most importantly, this now means that any new entry into this market, for the entirety of the moratorium, has to be through a brownfield operation, either through a direct acquisition of an existing player or purchase from CBK, of a seized bank.

Mr Bodo is an investment analyst. @GeorgeBodo