Capital markets crisis rocks banks’ stability

By James Anyanzwa

The persistent disorder in the local capital markets has threatened the stability of the banking sector.

The Central Bank of Kenya says while the financial sector thrives on confidence, any threat to that confidence to one of divisions could be catastrophic.

The banking regulator tore into the Capital Markets Authority (CMA) and the Nairobi Stock Exchange (NSE), telling them to put their acts together and restore sanity to the turbulent market.

"CMA and NSE have been sneezing a lot … and the banking sector is almost catching this cold," candidly explained Rose Detho, CBK’s director of bank supervision.

She, however, fell short of explaining how the current capital market instability is affecting the banks.

"My challenge to CMA and NSE is that please put your acts together and see how you can restore confidence in this market."

CBK’s fears came amid mounting pressure for the merger of all the financial sector regulators into a single entity. The regulator’s plea to its counterparts came even as the Finance minister Uhuru Kenyatta indicated that efforts at reconstituting the beleaguered CMA board were progressing well, and that two directors have already been brought on board.

Single regulator

Experts have argued that a single regulator could help streamline the operations of the financial sector, and eradicate unethical behaviours amongst market intermediaries that have weighed heavily on the fragile investor confidence.

John Ngumi, Director of CFC Stanbic Bank, contends that the industry has problems, and may be just hiding behind the international financial crisis. He said there has been a mess in the stockbroking and investment banking community in terms of governance, capitalisation, ownership and resistance to change.

"It is time we looked at the entire regulatory regime. We need a unified, simplified regulatory regime for our financial system. It is time to put our capital markets together in terms of mobilising savings," said Ngumi.

Detho admitted that there was a need for unifying the regulatory arms of the sector. "It is true we are disintegrated," said Detho.

Ndetho said CBK has signed agreements with Tanzania, Uganda, Rwanda and Burundi to integrate their regulatory frameworks.

She reckons that it is prudent for the local financial sector to integrate its own regulatory framework ahead of the regional initiative.

Hezron Nyangito, the bank’s Deputy Governor, however, hinted at plans to review upwards its deposit guarantee scheme as a measure to solidify depositors’ confidence by ensuring sizeable compensations in the event of bank failures.

The bank’s Deposit Protection Fund (DPF) currently pays up Sh100, 000 to in refunds to depositors when a bank collapses.

"This is an area that we are looking at with a view of reviewing cash ratio upwards to provide more security to depositors," said Nyangito.

At the same forum, the African Development Bank (ADB) said the second wave of the global financial crisis, which is manifesting itself in the form of a global recession, might feed into a new round of banking failures in Africa.

"We may begin to see the economic crisis feeding into a new round of banking failures in Africa," Dr Louis Kasekende, the bank’s Chief Economist said.

The CBK said local commercial banks have since not been impacted, but called for caution going forward.

"This crisis is still unfolding. We are yet to see the impact. As the situation unfolds we are ready to come up with cushioning mechanisms," said Njuguna Ndung’u, CBK Governor.

"We know the issue, we know the parameters, but sometimes we don’t know the direction."