Sailing on Titanic

Published on 21st June 2005

In the banking industry battle, there seems to be a great division between the large and the small banks.  From the regulation body down to the clients, there is a shout that the small, almost afloat must find ways of keeping up with the tides.  Failure to do so might lead to the Titanic mission, and then the industry will end up far worse that it was in the 1990s.  Unlike Banking in Africa, one unique trait with the Western banking industry is that it has slowly evolved to get to the point of full independence, thus focusing on a future orientation.  Besides, their trading systems and instruments naught exist in any one African country. Their global activity and reach makes it too hard to fall and their failure would inflict severe damage on one or more of the national economies.

After studying the pros of a huge capital base for banks and the achievements of those that have held such for a period of time, I now see the truth behind Dr. Mulleis hard command on small banks to merge.  This also follows the unfolding story of Daima Bank, from the time it was put under statutory management in March 2003 to the time of its collapse in June 2005.  As the small banks face even harder, more pressing times, it’s unlikely that times will get any better.  The option for the small banks therefore seems too limited.

From the CBK’s Inspection Report, it is likely that small banks will be forced to shut their doors.  It emerged that out of the 46 banks in Kenya, 33 did not comply with the set Central Bank’s regulations. The few that were fully compliant were only the Multi-National Banks.  Among the key issues raised during the inspection were the liquidity risk, investment risk and credit management.  According to the report, most banks did not really understand what risk management was all about.  Most banks only associate risk management to loans, leaving all other issues in the cycle to chance until trouble sets in.

Clearly, the Central Bank does not seem contented with the performance of most commercial banks especially the small ones.  The fact that the only 13 banks that complied were all multi national sends a signal that is self-judgemental.  These banks have a huge capital base and rely on different sources of income unlike the smaller banks that have capitalized on interest on loans.  It was evident that most banks had risk management in theory and never in practice. 

This is not only happening in Kenya. Some leading economies in Africa like South Africa, Egypt, Nigeria and Botswana can be said to be almost past that like. Take the case of Nigeria for example.  Nigeria’s government, through the country’s Central Bank, in an attempt to stabilize the banking industry last year increased the capital base and tightened the banks supervision.  This was based on the understanding that the higher the base, the more sustaining a bank is and thus the ability to meet both it’s short and long term objectives.  This has brought most local banks to operate almost at par with multinationals, both equally digging into each other’s market.

If such Central Bank moves are pushed even harder, we may be in a scenario that leaves less than 50% of banks in operation having closed all others due to non-compliance.  This is both positive for the industry and negative at the same time.  Positive because banks will see their strategic plans in decades and it is negative because it shuts away the small investor, who other than the small bank operating in the village without an office knows nothing else as far as the laws of asset safety are concerned. This however has an adverse overall effect on the economy because the MNC’s will in the short run capitalize on the small income desperate clients whose increased demand for service leads to increased charges and dwindling service. What are the effects of this in the economy? Remember the 1990’s banking woes.

I believe that The Central Bank governor is right. The future is more promising when banks especially the small ones are guaranteed of stable prospects.  What to do?  If you can’t survive, lay low and open doors for acquisition managers or merger experts.  Failure to do so would be inviting the wrath of the regulator.

Most small banks as is evidenced today are more worried about reputation risk.  This has led to the investments in Public Relations (PR) and less on the mainstream activities.  This has led to poor investment decisions that have greatly affected banks in times of crisis.  How long can this last?  I believe that it is not different from trading on stocks of a winding company whose returns could be 50 times lower that its current value. 

My proposition is two sided:  One should be extended by the Central Banks to the Commercial Banks.  The other is market based and it involves the Commercial Banks to fellow banks and their clients.  The Central Bank faces a lot of inadequacy in supervision, management standards and enforcement aspects.  It could be kudos for them after the release of their Inspection Report for calendar year 2004.  Unfortunately though, banks, especially those on the spot know that it is just another whole year before another inspection.  Doesn’t this tell of a flawed system, one that encourages banks to loosen up on compliance?

The International Monetary Fund (IMF), in January 2003 report, clearly explains the inadequacy of depth and breadth of Sub Saharan Africa’s financial markets.  The study involved 11 Sub-Saharan countries.  From the findings, 60% of banking sector assets concentrated in at most 4 banks, the loan portfolios were not diversified reflecting national economies. 

If the Central Bank steps up its acts, there will be more discipline in the sector thus encouraging more participation.  But participation, must involve stock market listing in the market to enable more critical management approach where the board oversees the running of the banks.       

The banks must also be ready for competition and stop whining about the multinationals tapping into their market.  Free market economies are based on competition.  The Investment Banking and Trust Company (a leading bank in Nigeria yet very local) Bank has managed to overcome all odds and is now competing in the international market with other conglomerates.  It has extended its service far and wide, setting up many regional branches.  Banks should also be innovative and come up with productive investment opportunities. 

A well regulated financial sector should be able to implement effective asset freezes, know customer requirements and establish policies that ensure transparency. These will guard banks against financial crimes such as money-laundering, acts of terrorism, insider trading, excessive lending and corruption that have become synonymous with Africa.

The development of the financial sector is crucial for growth, improved productivity, increased rate of investment and better savings rates.  Is your bank big enough to survive the iceberg or is it headed for a downfall?  Let the Central Banks answer that.

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