EDITORIAL: Strong regulation exposing ills in the banking sector

 

President Uhuru Kenyatta addressing Parliament on March 31, 2016. PHOTO | PSCU 

By BUSINESS DAILY

The image of Kenya’s banking sector as stable, well-run and highly profitable is starting to unravel with more cases of bank failures, mounting losses and insider fraud coming to light.

Increasingly, the lenders are also now reporting larger stocks of non-performing loans and allocating higher sums to cushion themselves from exposure to bad borrowers.

This is a far cry from 2012 when banks reported relatively lower bad debts and provisions despite the tougher operating environment at the time when there was runaway inflation and interest rates of up to 30 per cent.

What this demonstrates is that the stellar performance by the industry over the years has been aided by hiding risks and hitherto weak regulation.

Indeed, the reversals of profits seen among lenders like National Bank of Kenya (NBK) prompts one to wonder how many previous bank earnings were smoke and mirrors.

While the clean-out exercise being spearheaded by the new management at the Central Bank of Kenya (CBK) will undoubtedly cause pain in the short term, it is exactly what is needed if banks are to survive and thrive in the long term.

A bank, basically acting as a middle man between depositors and borrowers, is a special business whose failure can hurt a lot of businesses and families. That is why CBK must press on with its quest to ensure banks remain prudent and well-managed.

Action has to be taken against directors and executives found unsuitable to lead a bank, including being barred from leading a financial services institution. Crimes like fraud have to be taken up by the justice system.

While the CBK has a general task of maintaining a sound banking system, the Capital Markets Authority (CMA) must also succeed in its separate role as the protector of investors’ interests.

There are 11 banks listed on the Nairobi Securities Exchange with a market capitalisation of about Sh675 billion and some of the lenders are clearly disobeying securities laws at the expense of investors.

NBK, for instance, failed to issue a public profit warning prior to Thursday’s announcement that it made a net loss of Sh1.1 billion in the year ended December, reversing the previous year’s net profit of Sh870.7 million.

Some investors bought NBK’s stock, ignorant of the material information and have already suffered capital losses of over 10 per cent.

NBK disobeyed both the spirit and the letter of the law in failing to inform investors that its earnings will be at least 25 per cent lower compared to the previous period.