Why small banks are important in lending sector

Dubai Bank branch along Kenyatta Avenue in Nairobi. This year saw two Kenyan lenders shut their doors, leaving customers stranded. PHOTO | FILE 

By SCOTT BELLOWS

In Summary

• When big banks and their paid researchers and associations represent the loudest voices clamouring for the change, then consumers and businesses should watch out.
• Often times, big does not equal better services.
• Increasing bank capital requirements may give the voting public the feeling that regulators look out for them and are out to strengthen the sector but it only covers up a lack of oversight and provides no meaningful protection enhancement.

Wafula cheerfully waltzed into his bank at the Garden City Mall in Nairobi. He greeted the teller and looked admirably around at the glittering modern furnishings of the new branch. He appreciated that he now could visit a branch closer to his home.

However, while Wafula waited for his transaction to be completed, he stared through the glass at a neighbouring bank branch where mall workers were removing signage, replacing it with that of another bank. He could see frustrated customers of the former bank, helpless and in despair, now that their former bank had collapsed and they had lost their savings.

Unnerved by his observations, Wafula wondered whether his own savings were safe in his bank. Unanswered questions punctuated his mind.

Should he move his money elsewhere? What would he do if his financial institution collapsed too? How could he determine which bank to use?

He simultaneously noticed the government’s proposed assault against smaller banks and pondered whether bigger banks were truly better.

Many of us throughout East Africa held the same thoughts as Wafula over the past calendar quarters. Many pundits demonised everything, from small banks to the Central Bank of Kenya to Treasury to governance procedures.

Finger pointing aside, Kenyan consumers must possess tools to decipher appropriate financial institutions.

First, the government’s battering against small banks stands as unfounded. The correlation between bank failures as a result of capital requirements in absolute terms lacks credible evidence.

If banks must increase capital from Sh250 million to Sh1 billion in 2012 and then again to Sh5 billion by 2018 under current proposals, expect lower competition, higher costs to consumers, slower response times for approvals and lethargic solutions to bank errors.

Thankfully, Central Bank governor Patrick Njoroge opposed the Treasury’s plans.

Increasing bank capital requirements may give the voting public the feeling that regulators look out for them and are out to strengthen the sector but it only covers up a lack of oversight and provides no meaningful protection enhancement.

A comparative scenario might juxtapose a situation whereby in order to stop terrorists from entering Kenya, immigration authorities increase the size of passports.

Yes, bigger passports would represent an action step, but the causality towards making Kenya safer would equal nil.

The public is fed with such meaningless solutions against bank failures. When big banks and their paid researchers and associations represent the loudest voices clamouring for the change, then consumers and businesses should watch out.

Are big banks inherently bad? No. However, consumers should arguably maintain freedom of choice so that poor service by one bank or category of banks may meet with punishment from fleeing consumer funds to competitors.