I recall talking with a 72-year-old pensioner, who has her savings in Imperial Bank, now under Central Bank statutory management. I felt the anxiety and helplessness in her voice.
Taking over of a bank by regulators with Sh58 billion of our deposits should not be the subject of idle rumours, like the list of banks likely to follow Imperial Bank that was circulated in the social media. It is a serious business. It was uplifting to see Kenyan Bankers Association (KBA), putting the facts right to counter rumours.
Those circulating rumours and betting on the next bank to be taken over should spare a thought for such Kenyans and non-Kenyans who are now stranded. They did what they were supposed to, work hard and save. The emotional drain on such a takeover by the regulator is not fun. Most people do not keep money in the banks for show off, they use it for transactions; to pay debts, pay employees, pay for goods and services or save for old age when you are not as productive and job opportunities dwindle.
Today, lots of people including me rarely carry cash; we use cards to buy goods and services or go online to do our banking. Why else do carjackers take you to the ATM? Could closure of such banks tempt us to keep money under our mattresses and therefore deny banks their intermediation role, connecting the borrowers and lenders anonymously? Without banks, lenders and borrowers would be hard to match. Imagine putting an advert in the papers looking for someone to borrow your money?
The government is another major borrower from the banks, through selling bonds and notes, which however raises the interest rates particularly when the government is in dire need of money, like now. Banks would naturally prefer to lend to the governments as compared to individuals like you and I. Governments are less risky and always pay, no matter how long it takes.
This starves off private sector capital (crowding effect) and could slow down the economy. Remember private sector is naturally more efficient than public sector.
Some digression. Many Kenyans are asking where all the money went. The answer is simple: In the new constitutional dispensation, it became easier for everyone to access public funds, and the assumption that the public would check on our representatives as they use that money was an illusion.
I think the public admires them, as they globe trot and visit high end hotels. One could ask loudly, where did all the activists who used talk about corruption, inequality and so on go?
Few bother who generates that money. Kenya is a like a cow, we all want to milk it, but no one wants to feed it. The voices that suggested our new political structures would be expensive were drowned. It’s our moment of truth.
We however cannot rule out corruption and outright theft, which have become the new routes to misplaced heroism. Our committee of experts who drafted the 2010 Constitution should have co-opted a behavioural scientist like a psychologist or sociologist.
We may never know why Imperial and Dubai banks were taken over by Central Bank. I suspect disclosing too much information on why the banks were taken over could send panic across the entire baking sector.
What we cannot guess is the effect on the economy. The holding of the depositors’ money will definitely have an effect on the liquidity (money in circulation). Some hard-nosed economists could say that will reduce inflation.
The multiplier effect means the takeover of these banks will be felt by even those who have no account in these banks. If you are owed money by account holder from Dubai or Imperial, you may need that money to pay someone, who may want to pay someone else. Bringing in issues like correspondent banking, letters of credit and interbank lending and the spillover effects of bank closure becomes very clear.
Apart from this chain of events, the confidence in the economy and our robust financial sector will be hurt; the news on closure of banks travels faster than that on opening of new banks.
Take the global competitiveness index (GCI) latest report (2015-16), published by the World Economic Forum. Kenya is ranked 99, a decline from 90, the previous period (2014-2015). But deeper analyses shows that we score highly on financial development ranked 42 out of 140 countries; we were a respectable 24 the previous period! Soundness of banks ranked 61, not that bad. We were 54 in the previous period.
It is evident that our financial sector is one of the bright spots in our economy and needs safeguarding. There is no reason it can’t rank among the top 10 in the world, riding on innovation capacity which we also rank highly at 33 in 2014-2015 and 41 in 2015-2016.
