Ex-CBK boss says collapsed banks could have stayed open

Collapsed Imperial Bank depositors demonstrate outside the lender’s headquarters in Nairobi on May 31, 2015. PHOTO | SALATON NJAU 

By JAMES ANYANZWA

In Summary

• Njuguna Ndung’u, who left office last year, said he left an institution with enough ammunition to deal with rogue banks, and accused the new administration of failing to act decisively to forestall the crisis.
• Prof Ndung’u was summoned by the Parliamentary Committee on Finance, Planning and Trade to shed light on the collapse of Imperial, Chase and Dubai banks in just nine months.
• The CBK and Kenya Bankers Association should have held discussions to see the crisis through, as it “was mostly exogenous to the sector,” Prof Ndung’u wrote.

Kenya’s former Central Bank boss has blamed the collapse of three banks in quick succession on the new administration.

Njuguna Ndung’u, who left office last year, said he left an institution with enough ammunition to deal with rogue banks, and accused the new administration of failing to act decisively to forestall the crisis.

Prof Ndung’u was summoned by the Parliamentary Committee on Finance, Planning and Trade to shed light on the collapse of Imperial, Chase and Dubai banks in just nine months.

However, instead of appearing before the parliamentary committee, he sent a letter in which he seems to lay the blame for the closure on Governor Patrick Njoroge for placing the banks under receivership.

READ: CBK Governor Patrick Njoroge: A portrait of discipline, efficiency

According to the letter, receivership should only be deployed when banks have “proved beyond doubt that they are insolvent.”

The Banking Act and regulatory guidelines of CBK have Prompt Corrective Actions; the bank supervision department of the CBK can request specific commitments from the board of a commercial bank or change its composition, the approach which should have been applied, Prof Ndung’u said.

“I provided the incoming governor with comprehensive handover notes that covered the period from March 2007 to March 2015.

“This was the first time there was a proper handover to an incoming governor since 1982. In the handover notes, there are details of policy reforms on core mandates of the CBK, as well as the instruments used and the health of the banking sector and supporting institutions,” he wrote.

According to Prof Ndung’u, the growing proportions of non-performing loans were caused by factors outside the banking system, and had nothing to do with the quality of the loans contracted.

“The last two quarters of 2015 were extremely difficult for the economy, and it was also a devastating period for banks due to low economic activity and tight liquidity. When there is low economic activity and tight liquidity banks suffer, and medium to small banks suffer the most,” he said.

Data from CBK shows that the ratio of gross NPLs to total loans rose from 4.6 per cent in June 2015, to 8.2 per cent in April 2016.

READ: Kenya’s banking sector was a crisis waiting to happen, say analysts

The CBK and Kenya Bankers Association should have held discussions to see the crisis through, as it “was mostly exogenous to the sector,” Prof Ndung’u wrote.

Dr Njoroge and Kenya Bankers Association chief executive officer Habil Olaka did not respond to the assertions.