Rogue bankers are fighting back, shield the CBK governor

Central Bank of Kenya (CBK) Governor Patrick Njoroge during a press conference on Imperial Bank on October 21, 2015. Rogue bankers and cartels threaten Kenya’s efforts to create vibrant, stable and efficient institutions, a transparent environment and effective regulatory systems, clear rules, norms and values to secure the financial sector. They also put at risk the career of the new Governor of the Central Bank of Kenya (CBK), Dr Patrick Ngugi Njoroge. PHOTO | DIANA NGILA |

What you need to know:

  • After decades of steady growth, Africa is catching up fast with other emerging powers in the global south, popularising the narrative of “Africa Rising.”
  • However, the recent closure of several banks and its ripple effects in Kenya’s financial industry is calling to question this narrative and pointing to the need for far-reaching reforms to secure the gains.
  • Rogue bankers and cartels threaten Kenya’s efforts to create vibrant, stable and efficient institutions, a transparent environment and effective regulatory systems, clear rules, norms and values to secure the financial sector.
  • They also put at risk the career of the new Governor of the Central Bank of Kenya (CBK), Dr Patrick Ngugi Njoroge.
  • Kenya’s ninth Central Bank Governor has the discipline, intellectual and professional grounding and the global experience required to turn the country’s financial sector around.

After decades of steady growth, Africa is catching up fast with other emerging powers in the global south, popularising the narrative of “Africa Rising.”

However, the recent closure of several banks and its ripple effects in Kenya’s financial industry is calling to question this narrative and pointing to the need for far-reaching reforms to secure the gains.

Rogue bankers and cartels threaten Kenya’s efforts to create vibrant, stable and efficient institutions, a transparent environment and effective regulatory systems, clear rules, norms and values to secure the financial sector.

They also put at risk the career of the new Governor of the Central Bank of Kenya (CBK), Dr Patrick Ngugi Njoroge.

Kenya’s ninth Central Bank Governor has the discipline, intellectual and professional grounding and the global experience required to turn the country’s financial sector around.

Predictably, all things being equal, the former adviser to the International Monetary Fund (IMF), where he left 10 months ago to lead Kenya’s financial industry in June last year, has high chances of joining the league of the world’s best central bank governors like India’s Raghuram Rajan and Russia’s Elvira Nabiullina.

His dream for the Central Bank and the Kenyan financial market also seems perfect.

On September 29, 2015, the economics scholar declared that he was not looking to create a legacy for himself, but is keen to leave a better financial institution when he “walks out into the sunset” in the future.

His four-fold vision is ambitious, but attainable: He seeks to create “a world class central bank institution with sound laws and regulations steered by a world class staff and with world class processes; a vibrant financial sector; a more efficient financial sector, and an inclusive financial market.”

To be sure, reforms are painful everywhere, and are bound to elicit a determined fight back from powerful vested interests. But the odds are stacked against the Kenyan economist and banker.

The Kenyan financial market he seeks to reform is facing a perfect storm. A plummeting shilling, a runaway inflation and high interest rates threw Dr Njoroge into the eye of the storm.

He had to weed out shadowy banks and rein in rogue bankers and investors who exercise immense influence over lending policies.

With 42 commercial banks and more than 125 other players, one of the world’s highest - as compared to Nigeria’s 22 banks for 185 million people, South Africa’s 19 for 55 million - Kenya’s financial market is unwieldy and poses a real risk to the nation and to the investor.

Dr Njoroge has also faced the wrath of Kenya’s cruel, intrusive and indisciplined public culture.

He was deeply embarrassed when legislators vetting him wondered why he had no wife at 54 years.

Some even questioned the suitability of the former graduate of the University of Nairobi and Yale University citing his Opus Dei faith!

When the CBK issued a directive to banks that any customer depositing Sh500,000 or more must fill a form and those withdrawing Sh1 million must fill another form, the Governor came under severe attack even from some Jubilee stalwarts who accused him of “introducing Catholic Opus Dei rules in the banking sector.”

Wealth also seems to matter. While many Kenyans were baffled by Dr Njoroge’s decision not to take the privileges of power that go with his position, the bigwigs of the financial industry fretted about his suitability to steer the industry with no investment in Kenya.

In the wake of the closure of the Imperial Bank Ltd in August last year, the Dubai Bank of Kenya in October, the suspension of the chief executive officer and senior executives of the National Bank of Kenya pending an internal audit, and the collapse of the Chase Bank Kenya Ltd this month, rogue bankers are on the prowl, determined to shoot down institutional reforms in the financial sector.

Njoroge has three scenarios to learn from.

The first is the Nabiullina scenario in Russia. Elvira Nabiullina became Governor of the Central Bank of Russia in 2013 at a time when Russia and investors faced a perfect storm: Western sanctions against Russia for annexation of Crimea and the collapse of oil prices crippled access to international market and undermined domestic consumption.

However, Nabiullina hit the market with a bang, launching a new re-financing facility in July 2013. Her orthodox but painful policy measures - she increased interest rates, free floated the exchange rate, and kept a cap on the inflation - paid off.

The Euromoney Magazine named her the 2014 Central Bank Governor of the Year for helping to stabilise Russia’s financial system and boosting investor confidence.

The second is the Rajan scenario in India. When Raghuram Rajan, a financial maverick and professor of finance at the University of Chicago Booth School of Business (1991-2013) and former chief economist at the IMF, became the 23rd Governor of the Reserve Bank of India in 2013, the country’s economy was on a downturn.

He undertook surgical banking reforms. In January 2016, the Bankers and Euromoney magazines named Rajan the Global and Asian-Pacific Central Governor of the Year in 2015 for stabilising the Indian rupee, initiating key reforms to attract investors, and reining in runaway price appreciation.

The third, and worst-case scenario, is the Sanusi scenario in Nigeria. Here, Governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi (2009-2014), started off by setting up a 400 billion Naira fund of public money to bail out five banks facing liquidity issues, and fired their chief executives.

The Banker magazine recognised Sanusi as the Central Bank Governor of the Year in 2010 and the Central Bank Governor of the Year for Africa for his radical anti-corruption campaign aimed at saving 24 banks on the brink of collapse.

But here, corruption fought back, and won. Sanusi lacked the support of the government of President Goodluck Jonathan, who suspended him on February 24, 2014 over claims of “financial recklessness and misconduct.” But Sanusi maintained that his suspension was the consequence of his outcry over $20 billion in crude oil sales that the Nigeria National Petroleum Corporation had failed to remit to the Central Bank.

Dr Njoroge will need to stay the course in his surgical reforms to stabilise the banking industry. But he will need the solid backing of the government to avoid the Nigerian scenario.

Prof Kagwanja teaches at the Institute of Diplomacy and International Studies (IDIS), University of Nairobi, [email protected]