The house of flying daggers

In a recent staff circular, Central Bank of Kenya Governor Andrew Mullei took a thinly veiled swipe at the insular culture the organisation had adopted and warned that it threatened its future unless there was an immediate and radical change. 

That warning, in spite of all the good intentions, did not go down well with everyone. "You will recall that in my address to staff during the 2005 Christmas party, I alluded, albeit briefly, to the report submitted by the human resources consultants, Deloitte Consultants, and informed you of the impending discussions of the report by the Board," wrote Dr Mullei. "I am happy to provide staff with a brief background of the findings of the Consultant, the basis for implementation of the recommendations."

 

After a detailed study of Central Bank of Kenya's (CBK) labour practices, Deloitte came up with shocking conclusions of what Dr Mullei had feared. 

CBK, despite the pristine image, was overstaffed with all the wrong skills and, as a result, the organisation was hopelessly out of tune with the times. Yes, CBK at one time hired the best graduates from the local universities, but this practice had ended. Despite losing Sh4 billion last year to a decision to defend the strength of the shilling, it had a good profit track record and the richest pension fund in Kenya. As far as anyone could tell, it was not printing excess money illegally and it generally ran a tight and a quiet shop when it came to managing the banks.

However, deep inside, after reading the Deloitte's report, it was clear that CBK had long lost its way and over the last 15 years, just like most State-owned corporations, it had become the biggest and most secretive pork barrel project in Kenya. 

Yes, there were talented employees, but by and large, politicians' relatives were hired with the usual wink and backslapping culture that has become a social byword in Kenya. Many other workers had come to clerical positions because of nepotism, tribe and inside connections and stuck in those positions for years, earning the ceremonial annual pay increase of 10 per cent or more. 

After two decades on the job, some who had been hired as clerks were now earning Sh100, 000 a month and were waiting happily for a happy retirement from a generous employer. However, when the bank came to replacing vacant professional positions, for may be an economist or account who would be happy to earn a decent salary of Sh100, 000, there was no budget for such a princely sum.

According to insiders, it was not uncommon to find a good number of people who came to the office and surfed the Internet all day for personal business and waited for pay at the end of the month.

"In the Consultant's report, it was stated that the Bank has gradually been losing touch with realities both locally and elsewhere with regard to evaluation of appraisal, performance, reward and operational efficiency in general," said Dr Mullei. 

"The Bank's structures and operations have not been adopting fast enough to changes in the business environment. Being a large, non-profit banking sector regulator focused on noble national aspirations, the Bank is not expected to be oblivious of the realities on the ground, or blindly pursue new, novel and untested methods."

Deloitte revealed that Central Bank lacked a sound framework for reviewing staff salaries to ensure competitiveness. 

"This is evidenced by higher levels of salaries demanded by candidates interviewed for vacant senior and mid-level management positions leading to inability by the Bank to retain and attract high calibre candidates on account of 'low' level remuneration," said Dr Mullei. 

"The Bank might not be able to retain and attract professional practitioners from the labour market, the possibility of which may lead to ineffective succession planning in the near future."

After revealing an extensive restructuring, what Dr Mullei did not tell his employees was that Deloitte had recommended that at least 800 positions should be eliminated and the governor and his board were seriously weighing this option.  

Since the Deloitte report started being implemented, it became an instant lightening rod for controversy and vicious back-stabbing at the Bank, which saw Dr Mullei's governorship lurching from one crisis to the next with every detail played in the alternative, or 'gutter', press. This so undermined his authority and his ability to communicate to the world about the well-intentioned changes he was bringing to the bank.
   
With Dr Mullei now under suspension and defending himself against charges of abuse of office, it is not clear whether acting Governor Jacinta Mwatela and the board will be willing to go ahead with the project.

However, the Deloitte report and the controversy it caused within the bank provides a rare glimpse into the workings of an institution that is so shrouded in secrecy, but whose roles Kenyans take very seriously. 

On many occasions over the last 15 years, this institution has disappointed the country. As the Justice Julius Bosire-chaired Commission of Inquiry into the Goldenberg Affair found out, the CBK has on several important occasions failed in its mission of regulating the Kenyan banking system and guiding the economy due to negligence.

Though the national spotlight in the past one month has been focused on the palace coup on Haile Selassie Avenue that led to the suspension of Dr Mullei, the CBK has been a troubled institution for much of the last decade — failed by lapses in its management and the political stewardship of the people who rule this nation. 

After the rocky governorship of Mr Eric Kotut, the smooth handling of the fires of inflation and bad debts crisis in the mid-90s by Mr Micah Cheserem gave a false sense of optimism and success.

 

Yet, a deeper look at the workings of the CBK and comparing it to other central banks in Africa and around the world shows that the Kenyan counterpart has been lagging behind, pulled back by seeds of failure planted by politics of the day and limited vision of its management.

Today, CBK finds itself wobbling at a crossroad trying to figure out which direction to take or questioning in the first place what went wrong. On several occasions last year during long interviews, Dr Mullei was a disturbed man. Though he spoke passionately and eloquently in private conversation about his grand vision for CBK, he was a disaster when it came to getting out his message to a larger public. His has been a reticent governorship that felt awkward to crowd-pleasing public appearances and photo-ops. 

Dr Mullei rarely gave public speeches like his predecessors to communicate his vision to the country and the direction of monetary policy to the markets. 

In his view, Dr Mullei was leading a trouble organisation that was deeply in need of strong medicine. CBK's biggest failure, according to him, was in attracting and retaining good people.

"That is the root cause of all the failings in this organisation and I shall be happy to share with you some of the changes we are implementing," he said.

The two critical areas that he saw as urgently in need of fixing and lacked good people was in bank supervision and economic research. So far, he claimed that after a reorganisation and retraining of staff, the talent in bank supervision had improved dramatically. This led to the discovery of a major money-laundering ring among a group of banks, foreign exchange bureaux and supermarkets that is currently being investigated by forensic accountants at CBK together with Kenya Anti Corruption Authority (KACC) and Kenya Revenue Authority (KRA).

This money-laundering ring existed because CBK bank examiners turned a blind eye to the crime and even helped rogue banks defeat the law by taking bribes. However, the reorganisation of the bank supervision department turned a lot of dirt that forced Dr Mullei to threaten a number of banks with closure, forced some to merge and take huge provisions for bad loans. Even some of the big banks have been questioned because of all manner of things ranging from under-rating risks and, at one bank, a transaction involving huge insider lending to a director to help in financing a company takeover.
   
While the talent problem in the supervision department is being sorted out, Dr Mullei believed that research was still not up to speed, while in his vision Kenya should be an intellectual beacon to the rest of the world when it comes to economic research on Africa.

For instance, he continually insisted that though the CBK generally used economic models agreed with the World Bank and International Monetary Fund in guiding the direction of the economy by monitoring inflation and interest rates, these methods were not efficient. 

A case in point was a question regarding how long it would take tax breaks given by former Finance minister David Mwiraria to be felt in the economy or how long it took notice an effect of lowering or increasing interest rates on economic growth. Dr Mullei said that CBK could not answer such questions. 

"I have to admit that were are very far on the research front and this is one of the things that we need to fix urgently," said Dr Mullei. 

"In fact my biggest worry is that we could be using the wrong economic model that is making the Bank follow a restrictive monetary policy that could prematurely cause a recession." 

There are many answers like these that a competent modern central bank needs to have before making monetary policy decisions. Given that the primary objective of the CBK by law is to maintain price stability — and which the bank has further defined as targeting an inflation level of 4 per cent — lacking such tools is a key failing. 

It is no wonder that analysts and professional economists have always criticised the manner in which CBK communicates to the market. This has left the market to guess where the economy and key indicators like interest and inflation rates are headed. For instance, though the law now allows for the establishment of a monetary policy committee (MPC), its operations are shrouded in mystery and its composition is mostly likely to be directed by political, rather than cold professional calculations. In other countries, central bankers and members of MPC tend to be professional monetary economists with stellar academic credentials, at a minimum doctorate level.

It is not clear when Kenya's MPC meets, how often, while the minutes of its deliberations and the voting patterns of key players are not known. In other countries like England — where Kenya inherits most of its laws — and South Africa, the working of the MPC is a public affair.

Even as the CBK continues to struggle with its future, the bank has never really enjoyed autonomy from the Treasury. As it is now emerging, an amendment to the Central Bank Act to give the governor security of tenure and cover from political meddling by the Government has proved a sham. 

To the financial markets and the business community, the possibility that a governor could be looking over his shoulder for a right wink from a politician before making a decision is an unacceptable risk. 

To protect the integrity of the CBK, Parliament could be forced to change the law to elevate the security of tenure a governor enjoys, make it harder for the Treasury to meddle around and force the bank to report regularly to its Trade and Banking Committee.