It’s a full in-tray for incoming CBK Governor

Any time now, a new face will take over the big office at the Central Bank of Kenya and assume the role of steering the country’s monetary and fiscal policy.

President Uhuru Kenyatta will pick the new CBK governor from a list of three candidates handed to him by the Public Service Commission last week.

Sources familiar with the process said Dr Haron Sirima, the current deputy governor, stands a good chance after he registered the best performance in the interviews.

Others in the race are Dr Edward Sambili and Dr Geoffrey Mwau.

The successful candidate will serve for a four-year term renewable once.

INCREASED FINANCIAL INCLUSION

For the successor of Prof Njuguna Ndung’u, wit, resilience, support by industry players and political goodwill will be important as he seeks to guide the economy to prosperity and maintain its position as a powerhouse  in the region.

A weakening shilling, high lending rates and rising inflation which are a threat to macro-economic stability, are among the concerns that will demand his immediate attention.

The next governor will be building on the mixed legacy of Prof Ndung’u, who retired from the position last month.

Prof Ndung’u’s successes, however, outweigh the failures and it will require a star performer to fit into his shoes and build a legacy that spurs economic growth.

Kenya Bankers Association (KBA) chief executive officer, Habil Olaka says the industry expects the new leadership to build on the successes of the outgoing governor.

Under Prof Ndung’u, Mr Olaka said, Central Bank effectively played its role as a regulator thereby ensuring stability in the financial system. This  facilitated growth, he said.

“The growth that the banking industry has realised over the years has resulted in an efficient intermediation process that has not only supported the economy’s growth but has also led to increased financial inclusion,” Mr Olaka told Smart Company.

“The banking industry expects the new CBK governor to sustain this stance for the benefit of the economy.”

 Industry analysts say the immediate concern for the incoming governor would be to enhance the stability and predictability of exchange rate, inflation and interest rates, which are critical to economic growth.

“We have done well on inflation and interest rates stability, but the shilling exchange rate has been all over the place,” said Edwin Dande, Cytonn Investments managing partner and chief executive officer.

Mr Johnson Nderi, manager in charge of corporate finance and advisory at ABC Capital, said the two main tasks of a governor are monetary policy and banking regulation.

“I don’t think there’s a problem with the latter but the former is going to offer a headache. The slide of the Kenya shilling will be of concern to the government as it now needs more Kenyan shillings to settle the interest payment,” Mr Nderi said.

PRECAUTIONARY LOAN

Already, analysts at Renaissance Capital have raised the red flag over the risks facing the Kenyan shilling, which include prevailing insecurity in the country and declining forex earnings from tourism, tea and industrial goods.

The analysts have warned the local currency could weaken to 97.5 units against the dollar before the end of the year sparking fears of macro-economic instability.

“We expect the shilling to weaken to Sh97.5 against the US Dollar at the end of 2015,” the analysts said in their latest update on Kenya’s economy on April 17.

In February, the International Monetary Fund approved a precautionary loan of Sh63 billion to cushion the country against potential macro-economic shocks arising from a weakening shilling, bad weather and insecurity.

Despite the  global lender’s supportive gesture, the weakening shilling is likely to erode the gains the country has made from the fall in the international crude oil prices, a challenge the new CBK governor will no doubt face going forward.

A barrel of crude oil in the international market declined rapidly in the second half of 2014 by more than 50 per cent following increased output by major oil producers on the back of weak demand from Europe, US and Asia.

In June 2014, a barrel of crude oil stood at $115, but  it is now trading slightly below $60 per barrel.

“As an economy, we had hoped to accrue some benefits from falling crude oil prices. But now with a weak shilling, the benefits are likely to be negated,” said Fred Ikana, an analyst at Centsavvy Investments. 

Towards the end of 2011, mounting pressure from increased imports put pressure on the shilling and the cost of living in the country.

Against the backdrop of declining forex earnings, the local currency weakened to an unprecedented level of 107-units versus the dollar in October 2011.

Inflation in the year peaked at 19.72 per cent, forcing CBK to take the drastic action of raising the rate at which it lends to banks from 7 per cent to 18 per cent by the end of 2011.

The decision was aimed at putting the brakes on aggressive borrowing from the market and mop up excess liquidity in a bid to check macro-economic instability.

The weakening of the shilling and the spiralling cost of living saw interest rates rise from lows of 13 per cent in early 2011 to 30 per cent at the end of the year dampening borrowing and slowing economic growth.

Former World Bank Kenya economist Wolfgang Fengler likened the situation to flying a plane into a hurricane with one engine overheating and another one malfunctioning.

WORST GOVERNOR

For that, Prof Ndung’u was named the worst governor in Africa by a Reuters’ survey conducted in December 2011. He got the flak for being the “least effective policy maker for failing to spot and act against rising price pressures and then presiding over a stunning collapse in the Kenyan shilling.”

According to Financial Sector Deepening, interest rates have long been a contentious issue in Kenya with widespread disappointment that rates had not improved significantly as expected. This phenomenon has in the last decade sparked calls for control of interest rates.

The clamour for lower interest rates is still fresh in the minds of many politicians, policy makers and market players and it remains to be seen how the new governor will handle the situation.

Some of the reforms undertaken under the former governor in collaboration with KBA include the introduction of transparent loan pricing formulas such as the Kenya Bankers Reference Rate and the Annual Percentage Rate. Now, banks are obliged to provide their borrowers with details on how loans are priced.

Besides the expectation of improved synchronisation and consistency of coordination between CBK and National Treasury to enhance clarity around policy issues, analysts say the regulator still faces another challenge of addressing the country’s poor ranking in Anti-Money Laundering (AML). 

 Mr Dande said the incoming governor needs to implement a more transparent yet stringent AML regulation to curb terrorism and address the country’s precarious AML ranking.

“We are ranked the 13th riskiest country for money laundering by the Basel Institute of Governance, just ahead of countries such as Iran, Iraq, Sudan and Myanmar,” Mr Dande says. 

“Such mediocre ranking dents Kenya’s great brand as a regional economic hub and limits our ease of doing business around the globe.”

Analysts are also waiting to see if the new governor would be more engaged with financial market players beyond merely supervision, a practice Prof Ndung’u was accused of not paying enough attention to especially in his early days at the CBK.

Besides the appointment of CBK governor, President Kenyatta is also expected to fill the positions of deputy governor and chairman of the banks’ regulator from a list submitted to him by the PSC.

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CHALLENGES

Weak shilling big headache for  new CBK boss

•  A weakening shilling, high lending rates and rising inflationary pressure, all of which threaten macro-economic stability, are among the concerns that will demand immediate attention for new governor.

•  Analysts at Renaissance Capital have raised the red flag over the risks facing the Kenyan shilling, which include  insecurity in the country and declining forex earnings from tourism, tea and industrial goods.

•  Analysts have warned the local currency could weaken to 97.5 units against the US Dollar before the end of the year sparking fears of potential macro-economic instability.

•  Despite IMF’s supportive gesture, the weakening shilling could erode gains the country has made from the decline in international crude prices.

LANDMARK ACHIEVEMENT

Governor gave M-Pesa room to start off

Former Central Bank of Kenya governor, Prof Njuguna Ndung’u, took over the office in March 2007. This was at the eve of Kenya’s mobile financial revolution.

At the time, about 18 per cent of adult Kenyans had access to formal financial banking services.

According to Financial Sector Deepening Kenya director David Ferrand, M-Pesa was an idea that did not exist in practice. Prof Ndung’u opened the door for what was “a very uncertain experiment, for which there was no regulatory precedent”.

“He was brave enough to allow M-Pesa when other central banks were more cautious and disinclined to let innovations go ahead. Today, there are still only a handful of countries, which have successfully harnessed the potential of mobile money,” Mr Ferrand said on March 3, the day that Prof Ndung’u retired.

At the end of his tenure of eight years as governor, 67 per cent of adult Kenyans has access to formal financial services.

Despite setbacks that followed him as CBK governor, Prof Ndung’u was keen on improving regulatory frameworks in the banking sector.

“In August 2014, for example, Kenya’s National Treasury gave life to the National Payment Systems Regulations, 2014, which provide a formal legal framework for mobile money,” FSD indicates.

By not allowing regulation to stand in the way of innovation and for progressively supporting the development of a regulatory framework to support mobile money financial services, Prof Ndung’u gave M-Pesa a chance  to thrive to what it is today; the most successful mobile money service globally.