The time is right for banks to embrace corporate governance

What you need to know:

  • As far as bank customers are concerned, confidence in a bank’s financial stability is essential if we are to avoid catastrophic disruptions.
  • Developing a comprehensive code of ethics with a self-regulatory framework is the first step towards rebuilding public confidence in Kenyan banks.
  • In Nigeria, the government has decided to adopt the National Code of Corporate Governance, aimed at raising the standard of running entities.

We all know that a properly functioning banking sector is essential to any advanced economy and that confidence in banks is vital. Therefore, any loss of confidence in banking is a matter that demands urgent attention. Any response, however, must be well thought out, measured, and effective.

While it is true that confidence in Kenyan banking may have — over the past few months — been tested, we need to take a step back to understand the reasons for this. Only then are we able to remedy the situation.

First, as far as bank customers are concerned, confidence in a bank’s financial stability is essential if we are to avoid catastrophic disruptions. Financially secure and well-managed banking has a direct financial impact on banking citizens, not to mention an increase in foreign investment. Therefore, customer confidence is personal and immediate.

Secondly, and more widely, is the confidence of governments, regulators, and the community. Here the concern is to ensure that banks are not only financially strong and well managed, but that they also discharge their roles as required by law.

Properly discharging their obligations under the anti-money laundering legislation is one example. Within a span of about a year, we have had a front-row view of banking facing prudential challenges. It has now become common knowledge to all that banks have to get their act together in order to restore public confidence.  

An effective direction at the institutional level is a sustained and committed leadership that embodies the core values of good governance — transparency, integrity, and accountability. But what is really required is a standard of behaviour for the banking industry that is properly monitored for compliance and, when necessary, enforced.  

REGULATORY FRAMEWORKS

Developing a comprehensive code of ethics with a self-regulatory framework is the first step towards rebuilding public confidence in Kenyan banks.

Such a code and framework, properly resourced and managed with third party oversight, would allow banks to hold one another to account and respond collectively to individual or industry failings. This will complement the work of the government and other regulators.

Africa is not being left behind in embracing regulatory frameworks that build on public confidence. In Nigeria, the federal government has decided to adopt the National Code of Corporate Governance, aimed at raising the standard of running entities in that country.

On implementation, Nigeria will more likely have far-reaching positive impact on ease of doing business, investment climate, and local and international perception of Nigeria in the immediate future.

South Africa has continued to enjoy success in investment due to its corporate governance code, the King Report, which is grounded on the principles of self-regulation. As a result, the country has been ranked among the best in financial market development.

In light of that, corporate governance has enhanced the strength and legitimacy of South Africa’s economy in the face of an unpredictable and dynamic socio-political environment.

Here in Kenya, we have established self-regulatory frameworks, including the Nairobi Securities Exchange. We also have seen the Kenya Bankers Association move to develop a charter for the banking industry.

The essence of this code is for financial institutions to operate in a way that meets their basic responsibilities in corporate governance, human rights, integrity, and transparency. Consequently, financial institutions will be put to task to adhere to corporate governance reforms.

Around the world, countries and business are opening up to self-regulatory frameworks, given the benefits and opportunities to enhance credibility through accountability structures that include industry regulators and other stakeholder groups. This is the time for banks to act and restore public confidence.
 
The writer is the head of forensic at KPMG. [email protected].