Central Bank says it's open to foreign banks despite licensing ban

Kenya is still open to foreign investment in its banking industry despite a moratorium imposed on issuing new licences, Central Bank of Kenya Governor Patrick Njoroge has said.

East Africa’s biggest economy needs stronger supervision in banking, which has resulted in the temporary ban on licences, Mr Njoroge said at a conference in Cape Town on Friday. Kenya wants investment that can “add value and not just do a copycat,” he said.

Njoroge placed two banks under administration since he came into office in June. Dubai Bank Kenya was placed in liquidation in August after it ran out of money, while Imperial Bank was placed under statutory management in October after alerting the authorities to “inappropriate banking practices.” The halt on new licences was imposed on November 17.

The moratorium “is to give us space to strengthen our supervision,” Njoroge said.

The governor added that authorities are committed to maintaining a flexible exchange rate. Kenya has sufficient buffers to “ride out” the impact from any tightening of monetary policy by the US Federal Reserve, he said.

INFRASTRUCTURE BOND

The Central Bank said on Friday it would issue a nine-year bond with a coupon rate of 11 per cent to raise as much as Sh30 billion for infrastructure projects. Kenya sold another Sh30.7 billion worth of five-year paper at a yield of 13.92 per cent on Wednesday.

“The infrastructure bond has had a lot of interest from foreign investors, even domestic,” Njoroge said. “It’s a very attractive thing because you are told what is the specific project and it’s something anybody can support.”

Swelling twin deficits remain a worry for many investors as the Government increases spending on much-needed infrastructure projects. The $60.9 billion economy is running a budget gap of 8.7 per cent of gross domestic product in the fiscal year to June 30, 2016. The current account deficit may widen to about 9.9 per cent of output this year, according to the International Monetary Fund.

Njoroge said the Government’s aim was to have a more balanced budget or a smaller deficit. “In the end, the Government has to credibly not just signal, but show what its borrowing needs are,” he said.

The collapse of Dubai Bank, preceding the fall of Imperial Bank within weeks, sent shock waves across the banking sector. Small lenders were most exposed through a deposit flight to more established rivals, threatening the stability of the industry and public confidence.

Njoroge has in recent days said that banking supervision was a complex matter, specifically because commercial banks were always running ahead of the supervisor. Use of different core banking platforms only complicates the supervision since different software generates information in varying formats.

CBK expects that the moratorium on new banking licences could force mergers and acquisitions, which remain the only avenues that foreign banks, which have previously expressed interest in Kenya, could explore. Among the prospective entrants are Dubai Islamic Bank and Doha Bank Group, both from the Gulf region, which have been clear about setting up in Kenya as part of a wider plan to enter Africa.

Having fewer banks, as envisioned by the new measures, is a change of heart by Njoroge who had opposed raising the core capital requirement for lenders five-fold to Sh5 billion as proposed by National Treasury Cabinet Secretary Henry Rotich.

Mr Rotich said in proposals read out in this year’s budget, that enhanced capitalisation would force mergers and create fewer, stronger banks.

Njoroge, who was then a candidate for the job, favoured a market with more banks. His change of heart could be informed by the reality that confronted when he assumed office, including the admission that banking supervision so far was wanting.