KWAME: Imperial Bank saga shows why Central Bank should encourage whistle-blowers

What you need to know:

  • It is evident that in complex trading firms such as banks, regulators will almost always be less knowledgeable about the company’s affairs than managers and other insiders.
  • It is in the interest of the regulator to establish mechanisms that incentivise insiders to blow the whistle without fearing harsh reprisals.
  • The series of announcements by the Central Bank signals that the officers responsible for bank oversight may have panicked, and that there is no policy coherence.
  • The blameless shareholders of a bank who have exhibited good faith to admit to irregular activities deserve a chance to work together and regain the confidence of their depositors

Competing with the news that the Kenyan government faces a severe cash crunch is the industry-wide concern about the trading status of Imperial Bank.

Imperial Bank has been placed under statutory management after a decision by the Central Bank of Kenya (CBK).

The summary of the statements made by the Central Bank governor suggest that there may be risks to the financial system and that the receiver-manager will review the status of the bank and endeavour to get the depositors, creditors and the shareholders of the bank back in business.

Besides the terse statements issued by the CBK management, there is no information on the underlying causes of this decision. Nonetheless, the series of known actions that led to the CBK placing the bank under receivership provides some lessons on the state of regulatory affairs in Kenya.

It is evident that in complex trading firms such as banks, regulators will almost always be less knowledgeable about the company’s affairs than managers and other insiders.

INFORMATION GAP

The evidence for this comes from a concession made by the CBK that the board of directors brought to its attention some information on “inappropriate banking practices warranting immediate action”. Contained therein is an admission that some insiders knew what the regulator did not, and took the initiative by informing the regulator.

The lesson from this is that despite the technical competence of regulators, there remains an information gap between outsiders and insiders in firms. It is therefore in the interest of the regulator to establish mechanisms that incentivise insiders to blow the whistle without fearing harsh reprisals.

Besides the acknowledgement that the initiative came from members of the Imperial Bank board, it is unclear to me that the posture of the regulators has shown appreciation of this.

The reason for this assertion is that the board members must have taken this difficult decision with expectation that subsequent policy decisions taken by the regulator would not be punitive but preserve the institution.

'PANICKY' OFFICERS

It is clear that the appointment of the receiver-manager by the regulator may not have been the option the board of directors preferred. Thus, as an example for an expanding industry, the CBK has failed to inspire the confidence of future whistle-blowers, because the good faith of the whistle-blowers has not engendered sensible regulatory leniency.

Repeated declarations from the Central Bank confirm that it has not shown a steady and firm hand in executing regulatory policy in this case. The quick resort to appointment of receiver-managers is telling because the track record of this policy move in Kenya is very bad. In most cases, the appointment of receiver-managers for banks or other institutions is usually a signal that the institution will not recover.

To be honest, receiver-managers do not have any incentive to revive a commercial enterprise because their fees does not depend on that outcome.

While the CBK may be fully hopeful that the affairs of the Imperial Bank will be regularised, allowing it to resume business in the shortest time possible, the series of announcements signals that the officers responsible for bank oversight may have panicked, and that there is no policy coherence.

POLICY BLUNDER

Thus, in the absence of a coherent regulatory policy, the easier option is to appoint receiver-managers and let it be as it may.

I consider this a policy blunder because of the very fear expressed by the CBK governor. By virtue of the fact that the conventional bank takes deposits from clients and is run by people who have some capital in it, the regulator ought to understand that this trust can only be maintained with close cooperation of these two parties.

The blameless shareholders of a bank who have exhibited good faith to admit to irregular activities deserve a chance to work together and regain the confidence of their depositors, but it is clear, to me at least, that the receiver-managers will not manage with this value in mind, even if they assert that in public.

They have no skin in the game, and, anyway, their financial interest will be covered whether the institution survives or not.

As it stands, the CBK has taken out its big stick, but what I read is panic and an unsure footing. It only needs to align the interests of the depositors and shareholders and ensure that the receiver-managers do more than spend months or years drawing monthly cheques for themselves.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi, Kenya.