Smart banks should exploit ‘cautious moment’ attitude adopted by industry

Each bank reads the new law to their liking: Does anyone smell consolidation here? Mergers and takeovers? PHOTO | FILE 

By DENNIS KABAARA

In Summary

• The beauty about F1’s ‘safety cars’ is that as race managers reorganise for a restart, the leaders lose their advantage.

In late June around the time we were debating the proposed Banking Amendment Bill which is now law, an intriguing headline appeared in the Nikkei Asian Review’s online version.  It read 'China Takes Back Control of Interest Rates'.

Given the ever-growing “BFF” (best friends forever) relationship between Kenya and China, I cheekily assumed this to be one of those shared moments that last forever.

That these BFF relations are getting stronger by the day was succinctly captured in a Sunday Nation story at the beginning of the week about a forthcoming exchange programme between the recently launched Jubilee Party and China’s ruling Communist Party. 

Reading from the story, it seems this programme will cover— in the diplomat-speak we love — matters of “mutual political interest” such as party organisation and cohesion, grassroots mobilisation and governance in general.

Clearly, quite a few people who matter in Kenya are so unhappy with our liberal Constitution, our multi-party democracy and all of this other modern (read Western) stuff that they have privately determined that it is inimical to the needs of our “developmental state”. But I digress.

Back to the interest rates story. The short version is, following a period of financial liberalisation (lending rates freed up in June 2013, deposit rates in October 2015), the People’s Bank of China (PBOC) reintroduced lending rate floors and deposit rate caps in an attempt to strengthen banks’ future position while allowing for the write-off of a growing pile of bad loans.

In other words, cleaning up the banking sector balance sheet and restoring minimum levels of profitability and return on investment.

Let’s read that last paragraph again. Lending rate floors?  Deposit rate caps? To quote the Nikkei story, “By setting a minimum lending rate, the government wants to keep banks from a race to the bottom in a bid to find borrowers.

A cap on deposit rates will also curb funding costs, helping to lift banks’ profits”.

“Parallel universe” is the immediate phrase that comes to mind — we cap what they floor; they floor what we cap. Of course, that’s too simple.

But it strikes me that China’s banks have a specific developmental purpose that its politics envisages (to the chagrin of world financial markets); which our own increasing predilection for monolithic politics seems eager to emulate.

Good luck with that!

In fact, back on Planet Kenya, the early responses to our own interest rate controls have been very Brexit-like. The politicians love it in public.

The Central Bank of Kenya (CBK) seems so befuddled at the political disregard for its advice that it’s forgotten its regulatory role in the law’s implementation.

One suspects that the IMF’s own comments about the “politicisation of monetary policy” at CBK’s recent Golden (ahem!) Jubilee celebrations were met with stony silence.

That bank stock values on the Nairobi bourse have plummeted, while future returns on investment will diminish (by half, according to one estimate) should come as no surprise.

Neither should the flight to quality customers, or the reported chicanery involving new levies, charges and the like. Not to mention the other flight to quality — risk-free government paper.

Each bank reads the new law to their liking. Mobile loans are “in” for some, “out” for others. Smaller banks have remained largely silent. Does anyone smell consolidation here? Mergers and takeovers?

Yet Kenyans remain hopeful. This week the Monetary Policy Committee (MPC) reduced the benchmark Central Bank Rate to 10 per cent.

The silent screams among banks intensify — a seven per cent deposit rate floor and a 14 per cent lending rate cap. More public optimism; eagerly awaiting the credit avalanche.

What’s wrong with this picture? Yes, as the Business Daily has noted, CBK’s extended “sulk” increasingly looks like a dereliction of duty. 

Yes, as I asked before, what were we trying to fix? China knows what it’s fixing, and it still has enough heft to act in “self-interest” without the need to pander to other interests. 

But two other perspectives interest me about this business of controlled interest rates. On the one hand, there is government’s borrowing appetite, especially in a pre-election year when projects must be completed, promises must be kept and competitive politics costs lots of money.  As recent T-Bill over-subscriptions suggest, banks are going “risk-free” and this is reducing yields. 

So the government is borrowing cheaper (good) and more (not so good).  No need for another Eurobond in this post-Brexit climate (though Ghana did quite well in the market last week). 

Why account for the original Eurobond if projects are completed? Who’s worried about “crowding out” private sector? Call this the “macro-angle”. 

Of higher interest (pardon the pun) is the “micro-angle”. Like it or not, this interest rate law was inspired by a view of banks as “people/SME-unfriendly” profiteers. 

Subsequent “stiff upper lip” indignation suggests banks aren’t quite ready to innovate. Remember IBM and the personal computer?

Of course I generalise here, but one suspects there is more than one bank reflecting on that core banking system they spent lots of money on, with subsequent Internet and mobile banking “add-ons” when today’s banking business model sees the customer as branch, channel and experience rolled into one.

Tough reading choice

It’s almost as if bank executives have been presented with a tough reading choice between two lovely books I have come across — Who Moved My Cheese? by Spencer Johnson (a great motivational tale of rats and little people with lessons on dealing with change) , and Who Moved My Soap? The CEO’s Guide to Surviving Prison: The Bernie Madoff Edition by Andy Borowitz (no explanations needed).

Forgive the imagery, but are our banks undergoing a Formula One (motor racing) experience right now? Some mishap on the track; race hasn’t stopped; we have a “safety car” leading the cars around.

The beauty about “safety cars” is that – as race organisers (read CBK) reorganise for a “running restart” — the erstwhile leaders lose their advantage, while those trailing can re-jig their race strategy and tactics.

Thought about in this admittedly optimistic way, who’s ready to exploit our “safety car” moment?

Kabaara is a management consultant. dkabaara@gmail.com