Is the Kenyan Banking Sector at Risk?

Fredrick Ngugi Apr 11, 2016 at 01:24pm

April 11, 2016 at 01:24 pm | Money Moves

Fredrick Ngugi

Fredrick Ngugi | Contributor

April 11, 2016 at 01:24 pm | Money Moves

A group of Kenyan depositors stranded outside a closed bank building. (Photo www.the-star.co.ke)

The ongoing crackdown on rogue banks in Kenya has left the majority of Kenyans worried about the overall health of the entire banking sector. Over the past eight months, three Kenyan banks have been liquidated, the latest one being Chase Bank Limited, which was put under receivership last week on Wednesday, leaving thousands of depositors stranded.

In August 2015, the Central Bank of Kenya ordered the closure of Dubai Bank in Kenya, which had been placed under receivership in the same month on accounts of “violation of banking laws and regulations.”

Two months after the liquidation of Dubai Bank Limited, Imperial Bank Limited followed suit, locking in over 58 billion shillings worth of deposits. Not forgetting that Barclays Bank has already announced its intention to exit the African market.

It is this trend that has left so many Kenyan depositors worried about the state of the country’s banking system.

Restoring Confidence

The Central Bank of Kenya has since come out to quell the growing anxiety, asserting that the Kenyan banking sector is safe and sound.

Addressing the media on Sunday, Central Bank Governor Mr. Patrick Ngugi Njoroge reassured Kenyans caught off-guard by Chase Bank’s predicament that the banking sector is healthy and is expected to normalize once the ongoing cleanup is over.

“From Monday, we will offer a facility to any bank or micro-finance institution that comes under liquidity for no fault of its own. We will offer this facility for as long as is necessary,” the Governor promised.

Mr. Njoroge did not disclose the amounts to be provided to affected banks; he did, however, condemn Kenyans on social media, accusing them of spreading malicious rumor, which he claims was the main reason for the collapse of Chase Bank Limited.

President Uhuru Supports Governor in Bank Cleanup

Following the public outcry over the sudden manner in which Chase Bank’s closure was announced, President Uhuru Kenyatta has come out to support the Central Bank of Kenya, asserting that the ongoing sanitization of the country’s banking system was long overdue.

Speaking in different occasions since Chase Bank LTD was put under receivership, President Uhuru has maintained that:

“What we have is a situation where the governor, and I support him, is just saying we must strengthen and remove weaknesses in our banking system. I personally believe the governor is doing what is in the best interest of the overall banking sector and what is important to me is to ensure all our depositors, especially the small depositors, remain and stay protected.”

Reasons for Bank Liquidation

While the Central Bank of Kenya’s Governor maintains that reckless social media rumors were the main reason why Chase Bank LTD collapsed, he also cited other critical issues that he believes continue to bedevil a significant number of banks in the country.

Among the key reasons for the latest bank liquidation trend is violation of banking laws and regulations, which include failure to operate within the required capital and liquidity ratio. This was the case with Chase Bank LTD, due to massive withdrawals by depositors. The rush to withdraw followed rumors that the bank was about to collapse.

The other main reasons given were provision of non-performing loans to bank employees and directors, which run into billions of shillings and poor corporate governance.

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