× Business BUSINESS MOTORING SHIPPING & LOGISTICS DR PESA FINANCIAL STANDARD Digital News Videos Health & Science Lifestyle Opinion Education Columnists Moi Cabinets Arts & Culture Fact Check Podcasts E-Paper Lifestyle & Entertainment Nairobian Entertainment Eve Woman Travelog TV Stations KTN Home KTN News BTV KTN Farmers TV Radio Stations Radio Maisha Spice FM Vybez Radio Enterprise VAS E-Learning Digger Classified Jobs Games Crosswords Sudoku The Standard Group Corporate Contact Us Rate Card Vacancies DCX O.M Portal Corporate Email RMS
×

Why forced bank consolidation plan is questionable

BUSINESS
By Mbatau wa Ngai | May 7th 2016 | 3 min read
By Mbatau wa Ngai | May 7th 2016
BUSINESS

Conventional wisdom among some bankers that forced consolidation is the only way to strengthen banks to withstand industry shocks, is questionable on several counts.

KCB Group was appointed receiver manager of the collapsed Chase Bank with plans to take up majority stake. [Photo: WILLIS AWANDU/STANDARD]

First, there is enough empirical evidence to prove that all banks, big or small, fail when they fall victim to reckless and, usually, insider lending. The question of size is, therefore, irrelevant. Indeed, experience from the better capitalised banks in Europe and America has demonstrated many times in recent past that they have only been kept afloat at the hapless taxpayer’s expense because the governments considered them “too big to fail”.

Second, the emergence of new and—by definition—smaller banks is due to their identification of a niche in the market that is not served by big banks. The founding of Equity Bank and, to a lesser extent, Co-operative Bank provides a incontestable testimony to this phenomenon.

The two banks, and a number of their smaller competitors, were set up at a time when the big three banks—Barclays, Standard Chartered and Kenya Commercial Bank—were systematically shutting down their rural and peri-urban branches in many parts of the country.

As though that was not locking out of the banking system, the big banks also increased the amount of money required to open and maintain an account. The result was that many relatively well-off coffee, tea and dairy farmers were greatly inconvenienced for they had to travel tens of miles to their district headquarters to access banking services.

Thousands of teachers and other employees in the rural areas found themselves in the same quandary. That opened the door for Equity and Co-operative banks, and later others such as Family, to walk into what had been, until then, an exclusive members’ club and walk away with the prize.

Third, it is not lost on analysts that the two chief executive officers propagating the idea of forced consolidation are running banks with a history going back to the bad old days when opening and operating an account was regarded as a favour bestowed only to a select few. It may, therefore, not be too far-fetched to conclude that the two chief executives are missing the good old days when their predecessors run their banks like latter-day aristocrats.

Fourth, it does not take rocket science to conclude that part of the local economy’s rapid growth and resilience in the face of external shocks has been due to the emergence of niche banks serving specific market segments.

Fifth, a closer look at the banks’ past failures reveals that they were almost all victims of questionable banking practices which included, but were not limited to, attracting big corporate depositors by offering them high interest rates. This strategy eventually proved unsustainable particularly when these expensive deposits were then on-lent to friends and relatives without adequate securities. The big depositors also undermined the banks when they sought to withdraw en-mass their huge deposits.

This may explain why Central Bank of Kenya Governor Patrick Njoroge’s argument that forced consolidation would only create more dominant players that would be considered “too big to fail” is gaining so much traction. The country would be better served were the policy-makers to pay more attention to the CBK governor and lend him the support he needs to not only strengthen his institution’s supervisory capacity by introducing the latest forensic audit practices and cracking the whip on errant bankers.

But the governor may also need to demonstrate he understands that charity begins at home by instituting a thorough clean-up of his own house. Sending home the staff who slept on the wheel while the vehicle careered off the road might be a good start. To his credit, President Uhuru Kenyatta has weighed in on the debate and declared no banker who plays fast and lose with depositors money will be spared, but the jury is still out on his sentiments will be translated into concrete action by the institutions charged with the responsibility.

[email protected]

Share this story
Agony for 2,600 workers as Karuturi flower firm shuts down amid debts
More than 2,600 workers of one-time world’s largest rose flower producer, Karuturi Limited, were Friday sent home as the firm shut operations.
China rejected Kenya's request for Sh32.8b debt moratorium
China is Kenya’s largest bilateral lender with an outstanding debt of Sh692 billion.
.
RECOMMENDED NEWS
Feedback