CBK's emergency kitty welcome

Central Bank of Kenya's announcement that it will create an emergency kitty for banks to calm jitters in the market is welcome.

The closure of Chase Bank resulted in a prolonged tremor that threatened to sink the otherwise stable banks.

The "big brother" offer should provide some relief and stability in the short run; staving off irrational and panicky withdrawal of funds by depositors.

It is worth noting that Kenya's financial system has in place sophisticated governance and risk management structures, well-funded regulators and a banking system that is manned by highly educated personnel.

But the question is, why did these preventive measures fail to stop the collapse of three banks in a row?

It's high time the entire banking fraternity closely examined the causes of the continued failure of banks in spite of seemingly adequate controls, reporting systems and supervision.

The banking industry stakeholders must review the effectiveness and independence of internal audit, which is the first line of defence.

It is no secret that senior managers of banks wield unhealthy control over the budget, recruitment process and audit schedule of internal audit, hence weakening its independence.

Most internal audit reports and concerns are rarely given the attention they deserve and are allowed to gather dust, only to resurface when there is trouble.

Its high time internal auditors of banks have strong dotted lines reporting directly to CBK.

Also, CBK and the Capital Markets Authority and other professional accounting and auditing bodies should closely evaluate the dismal performance of external auditors in the banking sector.

Again, it's not a secret that in a bid to cut cost and labour hours, most auditing firms do not carry thorough bank validation checks; external audit reports are mostly copy-pasted from internal reports such as bank compliance and management reports and internal audit.

I have always wondered how a few audit firms are able to practically take all jobs on offer from bank audits, Government consultancy and lots of other work all over the country.

Surely, someone must be cutting corners. Anyway, it's important that firms engaged in bank audits demonstrate competence in their work.

CBK should set standards that external auditors must adhere to and qualifications of personnel conducting such audits.

CBK should also have the freedom to have a bank audited by an audit firm of its choice if the bank in question is struggling to meet set regulations.

The cream at the top namely Board of Directors, major shareholders and senior management have so far proven to be the weakest link in the banking industry's governance structures.

CBK must craft new ways of putting this group on a shorter leash either by diluting their powers or creating several layers of management structure and segregation to guard against outright theft, frauds, conflict of interest and violation of insider borrowing limits witnessed recently.

To some Kenyans, being a member of a company board is not seen as an opportunity to serve the public but a licence to steal, defraud and run down the same company.

Founders and owners of banks must deal with the institutions they own at arm's length, and CBK may have to insist on various professional bodies and other banking industry stakeholders having representatives on all banks' boards.