> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

Embed from Getty Images

In recent months several prominent banks in Kenya have collapsed, with Chase Bank (no relation to JPMorgan Chase) most recently placed under receivership by the Central Bank of Kenya (CBK) earlier this month. Additionally, this month it was announced that three majority government owned banks will be consolidated, and that voluntary mergers and acquisitions in the banking industry will be encouraged as a way to strengthen institutions. To better understand what this all means, I sat down with John Lwande, Director of the Africa Board Fellowship (ABF) program.  

DP: From your perspective, can you update us on what is happening?

JL: It appears that following an extended audit tussle last month, Chase Bank, which had established itself as the jewel among small and medium-sized enterprise (SME) lenders in the market, and attracted funding from big name international investors, collapsed on the 7th of April. While Chase pushed the blame towards the accounting surrounding the bank’s Islamic banking assets, more serious implications point towards governance problems. To illustrate the severity of these governance issues, for instance, we are told that the bank made a staggeringly large amount of loans to its directors, an average of KES 1.35 billion per director (USD 13.5 million). This is not a routine staff and associate loan. Actually, Chase had a loan program for staff. Its average loan size was KES 1.9 million (USD 19,000). How could an SME bank, a financial inclusion flag bearer, allow its directors to lend tens of millions of dollars to themselves?! In a recent interview, three leading Kenya bank executives decried the lack of governance and fiduciary responsibility of bank directors in the country and called upon auditors to be firm in their opinions to mitigate the risk of bank failures and avoid panic.

DP: Central Bank of Kenya Governor Patrick Njoroge said, “The CBK would not leave criminals to roam free in the banking system and cause the kind of problems experienced in several banks recently… We will not tolerate rogue bankers. There is no room for people who are stealing depositors’ money.” How would you react to these statements?

JL: Firstly, credit should be duly given to the new Central Bank Governor who, since taking over office last June, has stepped up CBK’s oversight and has consequently been able to take quick action against non-performing banks. The new governor is demanding better corporate governance.  He is also considering increasing capital reserve requirements and restricting new banking licenses. Such measures are not surprising considering that Kenya has many more banks (42) than, for example, Nigeria (22), which has four times Kenya’s population. The reference to rogue bankers was a message to the Kenyan people to reassure them that the Central Bank would watch banks closely and ensure that no one loses their deposits. I do not believe that any of these banks were set up with the intention of defrauding clients. As time goes by, however, the directors became entangled in the challenges of governance and oversight, which can lead to poor oversight, bad practices, and ultimately failure.

DP: It seems many clients’ deposits will likely be lost with the collapse of Chase Bank. Do you think this will have implications for financial inclusion in Kenya? Do you sense Kenyans now starting to fear and avoid banks?

JL: Chase Bank’s collapse unfortunately comes in the wake of the failure of two other banks in the very recent months. Imperial Bank’s doors remain closed, while National Bank hobbles along with a profit warning, the recent dismissal of its CEO, and a bleak future. There is evidence of clients moving their accounts from smaller banks to the larger banks to protect their hard-earned savings. However, as long as the big banks cannot offer the appropriate products and meet the needs of the lower-income segment, people will continue to risk their deposits with smaller banks that appear more accommodating – banks that seem to push the financial frontier and provide products that align with their circumstances. Meanwhile, in the short-run, deposit flight from smaller banks will certainly affect their liquidity and ability to meet the credit demand from this financially-excluded market segment.

DP: Calmeadow’s Failures in Microfinance and CFI’s Weathering the Storm both concluded that governance was the differentiating factor between financial institutions that survived a crisis and those that did not. As someone who has been a CEO and board member of financial institutions what do you think bank directors should do to prevent fraud, ensure deposits are secure, and survive crisis?

JL: Foremost, bank directors have a fiduciary responsibility and legal obligation to ensure that, above all, depositors’ funds are safe and banks’ risk management oversight ensures customer confidence and contributes to the growth and stability of the banking industry. Reputation risk should be placed high on bank directors’ agendas to ensure client loyalty and obligation. Risk management policies should be up-to-date with internal controls as well as AML practices that insulate the bank against possible frauds or collusions. Surviving a crisis will depend on the deposit base of the bank, but in reality, no bank can survive a run in circumstances such as we’re seeing in Kenya, and hence it is more efficient to be proactive and maintain a balanced customer base. Directors should keenly get more involved and watch the bank’s capital adequacy and liquidity management. In a terse televised statement, the Governor of the Central Bank of Kenya declared that Kenya’s banking system is sound and added that the Central Bank would not tolerate bad actors. However, banks must not wait for the regulators to step in. The front line responsibility for this oversight falls on the shoulders of bank directors.

DP: The Africa Board Fellowship focuses on issues related to client protection and navigating challenging environments for board members and CEOs throughout sub-Saharan Africa. What lessons from ABF do you think would apply well to the current situation In Kenya?  

JL: The CBK Governor and many chief executives in the financial industry have reiterated the need for stronger governance to establish a more stable banking environment and support economic growth. There has been great emphasis on the responsibilities of directors, auditors, compliance bodies, and other regulatory authorities to enforce close oversight. What has happened in Kenya and in other parts of Africa offers evidence of the need to strengthen the fundamentals of board oversight. A program like ABF plays a big role in meeting this demand. While it is assumed that board members know what they are doing, and it is indeed often the case that they are highly-qualified and knowledgeable, it is important that they are reminded of their auspicious role which carries with it a legally-binding obligation. It seems to me that directors may in the future have to swear under oath with a holy book in their hand that their primary responsibility is a fiduciary responsibility! While we are talking about Chase Bank, let’s not forget that directors can face a wide range of challenges from different sources. Across the continent, for example, board directors in Nigeria are responding to proposals from regulators to cap interest rates. There will be more challenges in the future, and the ABF program will need to continue to be a forum for discussing the toughest live cases so that CEOs and directors can share possible interventions or preventive strategies.

Have you read?

Governance Challenges in MENA Microfinance Institutions

What Can the Financial Inclusion World Learn from FIFA about Governance?

MIV Governance: The Case of AfriCap