Kenyan Treasury, Central Bank in Turf War Over Capital Rules

KENYA, Capital Markets in Africa: Kenyan Treasury Secretary Henry Rotich is counting on three bank failures in eight months to help drive through proposals that will reduce the central bank’s oversight of the industry.

Rotich, 47, is seeking to persuade lawmakers to accept proposals that will increase the amount of capital banks must set aside as safety buffers and is also pushing amendments to allow the government more influence in the management of financial institutions. Central Bank of Kenya Governor Patrick Njoroge has said he would prefer the process of bank consolidation to be “natural.”

“People’s reactions change when they see a problem,” Rotich said in an interview in the capital, Nairobi, on June 24. “Now there is sufficient information to think otherwise and say it’s time we have stronger banks.”

Njoroge, 54, and Rotich have been sparring since August, when the central bank rejected proposals that would have compelled banks to raise their minimum capital levels fivefold over the next three years. Lawmakers blocked the suggestion after the central bank chief said they were “rushed,” will squeeze smaller banks, choke economic growth and curb lending. The calls for extra capital came after Dubai Bank Kenya Ltd., Imperial Bank Ltd. and Chase Bank Kenya Ltd. were taken over by the regulator.

‘Creeping Influence’

The failures have spurred Rotich to push proposals to tighten supervision of the nation’s banking industry with measures that will include strengthening the independence of the Kenya Deposit Insurance Corp. The secretary wants to be involved in the appointment of the KDIC as statutory manager in the event of bank collapses, currently a preserve of the central bank, which manages the agency’s day-to-day affairs.

“Creeping political influence will naturally be viewed with concern given the potential conflicts of interest and moral hazards it presents,” said Gareth Brickman, a market analyst at ETM Analytics in Stamford, Connecticut, said. “The extent of the increase in the capital requirements they’re targeting would obviously be much tougher for smaller operations.”

Njoroge declined to comment on Rotich’s proposals when Bloomberg called his office.

The National Treasury wants to amend banking laws to increase their core capital to 2 billion shillings ($20 million) by the end of 2017, 3.5 billion shillings by 2018, and 5 billion shillings by the end of 2019. Kenya has more than 42 operating lenders serving 40 million people, with five controlling 70 percent of the country’s banking assets.

‘Overbanked’
“We probably are overbanked,” Rotich said, adding that the government wants to see more consolidation to weed out the weakest banks and create larger lenders able to wield their size to offer lower lending rates. Commercial lenders currently offer loans at an average of 18.1 percent, while the central bank’s key rate is 10.5 percent.

“This is an indirect way to indeed encourage consolidation in the sector, as smaller bank will struggle to meet these requirements,” Jacques Nel, a senior economist at NKC African Economics, said. “Deeper oversight over fewer banks will be more effective and support stability more than shallow oversight over numerous banks.”

To read a past story on Rotich’s push for consolidation, click here

Banks are already moving to raise cash in Kenya, especially among closely held companies, according to Sunil Sanger, managing director of Orion Advisory Services in Nairobi. Family Bank Ltd. and Sidian Bank Ltd. have said that they sold shares to existing shareholders, while Jamii Bora Bank Ltd., Equatorial Commercial Bank Ltd., National Bank of Kenya Ltd. and Consolidated Bank of Kenya Ltd. plan to follow suit. Credit Bank Ltd. and Fidelity Commercial Bank Ltd. have said they may sell stakes to private equity funds.

M&A deals have gathered pace, with four deals over the past two years, according to Maurice Oduor, a money manager at Cytonn Investments Management Ltd. in Nairobi.

The central bank this month approved the purchase by Tanzania’s M Holdings Ltd. of 51 percent of Oriental Commercial Bank Ltd., while Nigeria’s Guaranty Trust Bank Plc in February, 2014, completed the purchase of Fina Bank Group. KCB Group Ltd., Kenya’s biggest bank by assets, agreed to consider buying a majority stake in Chase Bank, which was taken over by regulators on April 7.

‘Zombie Banks’
Changes to legislation and new bank rules may come too late, with customers moving their deposits to the larger banks and smaller lenders struggling to raise cash in the financial and interbank markets, said Aly Khan Satchu, the chief executive officer of Rich Management, a Nairobi-based adviser to companies and wealthy individuals.

“We are in a situation where if you are capital light, you are essentially a zombie bank,” he said. “Market forces have imposed higher capital for banks already. The market is now in charge and legislation is behind the curve. ”

Source: Bloomberg Business News