Let 2018 be year that Kenya will reform its financial sector

Although very influential voices have lately been calling for the repeal of the lending interest rate capping law — and even with the mounting evidence that the controls have introduced distortionary pressures in the lending sector — I don’t see that happening any time soon.

In the New Year, I predict stiff resistance from the political class against lifting of the lending rate caps.

After all, the main reason the caps were introduced in the first place had nothing to do with economics.

More than a year since the controls came into force, and having looked at statistics and trends on parameters such as the private sector credit growth-to-GDP ratio and access to credit to Small and medium-sized enterprises (SMEs), it is clear that the lending rate caps have not served the interests of the ordinary consumer of banking services.

ECONOMIC BOOM
Still, the truth of the matter is, as we begin 2018, the interest capping law is not the main albatross around the financial sector’s neck.

Why do we forget that former President Mwai Kibaki managed to bring interest rates down without resorting to anachronistic lending caps?

By merely tweaking the cash ratio and other measures, the Kibaki regime influenced the Treasury bill rate downwards to one per cent.

Commercial banks had no choice than go back to intermediation and lend money to borrowers.

We then saw an unprecedented spike in the private sector credit growth-to-GDP.

The ensuing economic boom, which climaxed in 2007, remains an enduring legacy of Kibaki’s administration.

CREDIT GROWTH
We enter the New Year with a financial sector that needs major reforms.

Private sector credit growth-to-GDP has more or less collapsed.

We have a banking sector that is just too fragmented and with too many small banks to render effective competition.

Intermediation does not happen effectively, especially because banks are concentrating on making money from trading on government paper instead of from lending to businesses.

In modern financial systems, capital markets play a big role as alternative sources of funding.

But what is the State of regulation our capital markets? Ineffective to put it mildly.

CORPORATE BONDS
We have recently witnessed cases where bond and commercial paper issues are approved by the Capital Markets Authority (CMA) only for the issuing companies to collapse shortly thereafter — exposing members of the public to untold misery, including penury.

Examples that come to mind immediately are Chase Bank, Imperial Bank and Nakumatt.

We forget that the reason investors put their hard-earned savings in corporate bonds and commercial paper issued by some of these companies is because the public believes that approval by CMA means something.

The New Year is also the opportune time for us to revisit the idea of introduction of primary dealers in government paper — like the Ugandans did.

BANK CONSOLIDATION
We can choose a few of our large domestic banks, designate them as primary dealers and then introduce a system where all remaining entities will have buy Treasury bills and bonds from the primary dealers in the secondary market.

That is how we can eventually refocus our commercial banking system away from the obsession with government paper.

This is how to get them back to their true role: Intermediation.

And the new year is the opportune time to revisit the idea of bank consolidation.

A few big and well-capitalised banks plus niche and specialised players is what we should be considering.

MOBILE BANKING

Only policy-led consolidation, as happened in Nigeria, Malaysia and Chile, might be what we should be looking at.

Then you have the pending issue of reforming the National Payments System.

Today, Kenya leads in mobile banking driven by a mobile payments revolution.

Unfortunately, access to the NPS is still dominated by commercial banks.

Banks are the only entities allowed to keep clearing accounts with the Central Bank of Kenya.

MERGING
Is it not time we started a discussion on how and when to change that, in line with global best practice?

In Australia and Canada, for instance, significant financial institutions are allowed into the system to compete with banks in offering payments solutions.

I read somewhere that Canada recently allowed its apex sacco — the equivalent of our Kusco — into their National Payments System.

What happened to the idea of merging CBK’s Central Depository System (CDS) with the capital markets’ Central Depository and Settlement Corporation (CDSC) and giving the new entity clearing accounts?

What happened to the idea of merging our financial regulators?

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