Kenya’s financial services landscape is dominated by banks and this means that bank resolution policy and practice has enormous consequences for savers, owners and for the financial system.
Resolving these bank failures is an important role played by the Central Bank of Kenya, in spite of the big role of the Depositor’s Protection Insurance Corporation.
In the last three years, two major banking institutions in Kenya have put to the test the capability of Kenya’s institutions in bank resolution. Both were middle-sized banks that seemed to have prospects for impressive growth.
Of the two, the final resolution for the Imperial Bank Limited has demonstrated that bank resolution can be complex, but that Kenya’s central bank has not done a good job.
The Central Bank of Kenya has made inconsistent decisions and walked back on some declarations in a way that has harmed the interest of savers who had no knowledge of the shenanigans that took place at the middle and upper management levels of the bank.
TAG OF WAR
In the time since Imperial Bank was taken over for resolution, these depositors have been caught in the crossfire between the central bank of Kenya on the one side and the shareholders on the other.
Public records show that the regulators are rightly concerned with the fact that the shareholders should take responsibility for insufficient oversight of their management teams. In the quest to make that point and ensure that these shareholders are held responsible for their failure to prevent infractions of law and bank policy, the interests of the clients of the bank have become a secondary matter.
In the main, public interest in bank resolution is to prevent the possibility that one bank may cause imbalances in the financial system and create a sector-wide crisis. That stated, the policy toolkit for bank resolution is known, and it emphasises the containment of the crisis to the smallest unit and with speedy resolution, closure being a last resort.
Against this summary of the standard toolkit, it is clear that the three-year duration that it has taken in respect of Imperial Bank shows that speed and efficiency has not been a primary consideration for the CBK here.
Granted that this is a complex case in which proper audits and tracing of funds are necessary in order to assign liability, the passage of time has shown that both the Central Bank of Kenya and the Kenya Depositor Insurance Protection Fund have not acquitted themselves well here.
The information that has been disclosed shows that this bank was liquid even though management risks made it difficult to determine whether its liabilities and assets were properly on the record.
Bank resolution and deposit protection policy prescribes standard policy approaches and specifically to limit discretionary action by regulators and the insurance corporation.
Many bank clients who have their deposits locked in because their money exceeded the accepted threshold have been unjustly treated because of the delay in resolution and mainly because of an absence of coherence on the policy followed by CBK.
Reading from the various public statements and claims, no coherent policy is evident except the strong claim that the bank’s board of directors may have violated their responsibilities for oversight.
The gist of the policy approach is that this has become a war of attrition between the shareholders of Imperial Bank and the formidable tag team of the central bank and the Kenya Depositors Insurance Protection Fund, fought by way of claims and counterclaims.
In this process, a resolution plan seems to be a contest that has isolated the people on whose behalf the central bank should primarily be acting.
Whatever the outcome of these cases, most of the residual depositors who have no connection to the shareholders will have their assets degraded and will be in a far worse position than they would if the resolution was done more efficiently.
The key lesson from the last three years is that a clear checklist to handling bank failures in Kenya is not available or is not used consistently.
More importantly, however, is that directors of commercial banks in Kenya may fail in early detection of mischief and illegal conduct by their managers and ought to be held responsible for that.
The most salient point however is that Kenya’s bank resolution policy is not only incoherent but may be pursued in a way that fails to question the supervisory capability of the central bank and how that raises risks of bank failures that could be avoided.
What remains is an inefficient mechanism that harms depositors failed through inadequate supervision and an incoherent bank resolution policy.
Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame