Here’s why Central Bank does not want to license more banks

Central Bank of Kenya Governor Patrick Njoroge. [PHOTO: MOSES OMUSULA/STANDARD]

Central Bank of Kenya has conceded it is unable to fully audit the operations of 41 existing lenders in the market, after taking the unprecedented step on Tuesday blocking new entrants indefinitely.

Additional players would complicate the “hide and seek game” that is the supervision of commercial banks, which would always want to conceal their misdeeds from the regulator. Now, the banking sector regulator anticipates to build supervisory capacity before allowing any new lenders in cautionary measures that could help avert problems as the one presented by the collapse of Imperial Bank.

“The moratorium on licensing of new commercial banks by the CBK announced on November 17, 2015, has been informed by the need to strengthen CBK’s capacity to supervise the financial sector. This follows the recent developments in the banking sector — liquidation of Dubai Bank Ltd and the placement of Imperial Bank Ltd under receivership — which have highlighted the urgency of enhancing bank supervision,” CBK said in an emailed response.

Kenya has 41 licensed commercial banks, excluding Dubai and Imperial whose permits have effectively been nullified after they were put under receivership. The Standard had sought to understand reasons for suspending the licensing of new players in the country’s lucrative banking sector, which has attracted several foreign banks whose applications are at various stage of approval.

The collapse and subsequent liquidation of Dubai Bank, preceding the fall of Imperial Bank within weeks sent shock-waves across the banking sector. Small lenders were most exposed through a deposit flight to more established rivals, threatening the stability of the industry and public confidence.

CBK boss Patrick Njoroge has in recent days said that banking supervision was a complex matter, specifically because commercial banks were always running ahead of the supervisor. Use of different core banking platforms only complicates the supervision since different software generate information in varying formats.

“In this regard, the CBK has begun a review of the supervisory processes, the assessment of training needs, and recruitment of additional staff, in order to cope with the emerging complexities in the sector,” the statement from the regulator’s banking supervision department reads further.

CBK expects that the moratorium on new banking licences could force mergers and acquisitions, which remain as the only avenues that foreign banks that have previously expressed interest in Kenya could explore. Among the prospective entrants are Dubai Islamic Bank and Doha Bank Group, both from the Gulf region, which have been clear about setting up in Kenya as part of a wider plan to enter Africa.

“... the moratorium will provide an opportunity for banks to improve their business models, including through consolidation in order to enhance efficiency and long-term sustainability.” Having fewer banks, as envisioned by the new measures, is a change of heart by Njoroge who had opposed raising the core capital requirement for lenders five-fold to Sh5 billion as proposed by National Treasury Cabinet Secretary Henry Rotich.

Mr Rotich said in proposals read out in this year’s budget speech that the enhanced capitalisation would force mergers to create fewer but stronger banks. Dr Njoroge, who was then a candidate for the job, favored a market with more banks to ensure competition. His change of heart could be informed by the reality that confronted him once he assumed office, including the newest admission that banking supervision so far was wanting.