CBK should manage the banking sector prudently

Several truths about the banking sector make it a most delicate sector, demanding utmost care management. Truth one. There is no bank big enough to withstand its customers' loss of confidence. The "too big to fail" concept, as the Americans learnt in the financial crisis of 2008, is a myth. The entire banking sector is built on trust and the role of regulators in enforcing prudent banking guidelines is to ensure that this trust is not built on quicksand. If customers suspect a quicksand base, no bank, however strong, can withstand a run on its deposits, for there is no point at which banks hold cash equivalent to their deposits.

In the same way no economy can withstand a series of run on its banks without irreversible damage. The politically instigated collapse of the "African Banks" in the 80s and 90s injured the economy to an extent that we are yet to recover from. After the recent collapse of Imperial Bank and this week's unfortunate collapse of Chase Bank, the writing is on the wall for all but the Big Six, and unless the regulators take some immediate restorative action to stave off a domino run, we are headed to a financial crisis of momentous proportions.

Let me be clear, enforcement of bank regulations is non-negotiable. Investors in the banking sector using these institutions to fleece the public of its hard-earned cash belong to Kamiti. However, we must also take into account our history and context and sequence the enforcement prudently even as we aim for the ideal. The banking sector cancer has been growing for a while and attempting to remove the cancerous growth "cold turkey" will kill the patient. The cancer needs management before total corrective surgery is applied.

How did we get here? There is no question that somewhere along the way, the Central Bank of Kenya, the statutory regulator, got lax. It allowed some imprudent; nay criminal practices, to reign in some banks. The story of Imperial Bank is the greatest evidence of a regulator either fully complicit or grossly negligent. The explosive growth of insider loans in Chase Bank, to the extent that the shareholders had borrowed way beyond their equity, must have been known to the CBK. As far as I know these Banks file regular returns and it's easy to pick red flags. Remedial action, including punishment for any illegal activities would have been carried out long before the matter became public and led to a loss of confidence and a run on the bank. It is easy to blame social media, and clearly the scare mongering in twitter-sphere did not help, but that is more an excuse than a reason. People will listen to twitter rumours and the infamous bloggers in the absence of a believable narrative from competing sources.

A few months ago, there were similar social media stories on another bank. The Central Bank gave a convincing response and the bank survived. In any case we must learn to live with the reality of social media! Our current circumstances demand some urgent steps. The Central Bank must urgently calm Kenyans. People must know they will not lose their money if they do not rush to withdraw upon the slightest rumour for this will harm all banks, even the safest ones.

As painful as it is, Government will have to bailout some of the banks tottering towards collapse, but as an investment, much in the way that the Obama administration injected capital in its big banks in 2009. This must, however, be accompanied by a big stick on offending institutions. Some heads must roll. In some cases, what is sanitised as "insider lending" is outright theft. The regulatory regime must be strengthened including improving the early warning signs regime.

The proposal to raise raising capital requirements is now necessary; some banks are just incapable of survival. I do not belong to the crowd that believes the market will correct itself. Ours is a most imperfect market and some of the institutions heading to possible collapse hold savings of poor families and a struggling middle class. No government worth its name watches an inevitable storm if it can stop it. Governor Njoroge and CS Rotich, over to you.