CBK should explain bank moratorium to Kenyans

On November 18 this year a notice with the surprising statement that the Central Bank of Kenya had placed a moratorium on the issuance of new banking licenses until further notice was issued.

In its terse wording, this notice stands out and presents a curious moment in Kenya’s regulatory policy.

To start with, the authority of the Central Bank of Kenya (CBK) is guaranteed but is not absolute within Kenya’s constitutional order.  For that reason, the CBK is still subject to the principles of governance in executing regulatory policy.

That terse statement on the CBK website shows that Article 10 of the Constitution was not fully borne in mind when this decision was made.

Discretion to grant licenses is statutorily placed in the hands of the CBK but must be balanced with the fact that institutions that seek licenses are also pursuing economic rights. This decision to suspend the issuance of licenses necessarily affects economic rights and is therefore a proper constitutional issue.

Article 10 of the Constitution demands respect for democracy and participation of people in governance and rule-making in Kenya.

It is clear that suspending trading licenses is so profound that public participation was required in some fashion, even while accepting the unstated logic that the Central Bank of Kenya used in this decision.

As expected, the board of the CBK Bank and its leadership may claim that this decision was reached after very elaborate technical analysis, and is guaranteed to protect public interest.

This common premise among regulators that the complexity of an industry makes it unnecessary to consult with the public is contestable in itself, but also because it flouts a clear constitutional requirement for public participation.

Now, to assert that public consultation is required in regulatory policy reform is not to demand that Kenyans be assembled in a hall for a half-day meeting to respond to a document delivered two days before.

It is just that even for properly resourced institutions such as the Central Bank of Kenya, decision-making processes must demonstrate respect for professionals and interested Kenyans.

Yet the single-paragraph statement published to announce a freeze on licenses simply stated the order without deigning to explain the logic behind it.

That is egregious, does not lead to respect for the decision and may even attract adverse inference of an attempt to cover up unpalatable facts owing to recent troubles in selected firms in the industry.   

The language of the notice is familiar in Kenya. It mimics forty years of government notices issued to subjects who have to reckon with the power and might of authority figures.

This style of communication itself shows how little discourse has changed about where sovereignty lies. For all its very important roles in the economy and social life in Kenya, all officers of the CBK, among other regulatory bodies created in Kenya, perform those functions out of power delegated by the Kenyan people.

An important issue, such as the limitation on the issuance of licenses, ought to be explained to Kenyans.

That statement reminds one of the old assumption that regulators and those in public offices bear a monopoly of policy knowledge and the rest who may have opinions here and there have no option but to accept and move on. And who would dare question the oracle from Central Bank of Kenya?

Apart from the form of the statement that is the subject of this discussion, the effect of the regulatory decision may be unjust from a substance point of view.

While bank licenses are not issued casually, the suspension of issuance suggests that there were cases already under consideration.

According to the notice, the suspension of licenses was not time-bound but would remain in place until further notice. This means that any person with a query would be unable to judge when the decision would be revised or when any information on its extension is expected.

Good regulatory practice require a decision maker to give an indication of when a temporary decision will be reviewed, one way or the other.

Closely related to this principle is the tendency for good regulators to consider every case upon its own merits without suing the blunt instrument of moratoriums or bans.

It appears that this established principle of good regulatory practice is not one that bureaucrats at the CBK care much to understand or to practice. The result is unsatisfactory regulatory performance.

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