Why Central Bank reads mischief in Treasury’s move to control lending

?The fact that Dr Patrick Njoroge had no idea about the details of the Bill drafted by Treasury that may fundamentally weaken Central Bank of Kenya’s independence and make it almost irrelevant has shocked the market.

CBK only became aware of the National Treasury-commissioned Financial Markets Conduct Bill, 2018, after it was uploaded to the Treasury website two weeks ago.

With only a few days’ window to make comments on it, CBK has chosen a two-pronged approach; to fight it in the court of public opinion while promising to submit its views.

CBK Governor Dr Njoroge let the cat out of the bag and said the institution he has spent his tenure trying to build into an independent and strong regulator is under attack from anonymous sources, who want to tie its hands of enforcing regulations.

“This is not the time for hubris. It is time for action. Make no mistake, CBK is under attack. These are summons to act with courage to defend and strengthen it, reviving our hope in common vision for a modern CBK at the heart of a vibrant financial system,” he said.

Apparently, CBK since 2016 has been taken on a ride thinking that Treasury only wanted to draft a law to address the problem of interest rate caps.

When contacted, CBK favoured an incremental approach as opposed to a sudden dichotomy and in May, Njoroge met Treasury to discuss issues surrounding the rate cap.

During the release of the 2018 Economic Survey on April 25, National Treasury Cabinet Secretary Henry Rotich hinted about the Bill, whose impact CBK says is far-reaching.

“We want a law that can address the credit market and protect the interests of the consumer,” said Mr Rotich.

But Treasury had other plans. It took the opportunity to come up with a proposed legislation that emasculates CBK, strips it of powers to enforce the caps and ends up subordinating the Banking Act to the Financial Markets Conduct bill.

This is according to the CBK governor.

“This Bill does not deal with the interest rate cap issue and does not deal with fundamental issues that led to the caps. It actually takes a step in the wrong direction,” Njoroge said.

The Bill is rooting for the creation of four new entities to regulate access to credit; Financial Markets Conduct Authority, Financial Sector Ombudsman, Conduct Compensation Fund Board and Financial Services Tribunal.

And with each of them, the powers of CBK are chipped.

The Bill says that there will be established a Financial Markets Conduct Authority which will ensure that lenders do not charge or recover from the borrower or a guarantor any amount on account of interest that exceeds the maximum rates “as may be prescribed by the authority from time to time.”

Take away powers

This points to an authority that will take away CBK’s powers to signal interest rates through the Central Bank Rate and follow to ensure that banks are in obedience.

In addition, the President and Treasury CS shall have a big say on who sits on the board of the new authority.

Njoroge says the proposed law repeals certain provisions under the Banking Act for approval of fees, charges and other items, which effectively leaves bank customers at the mercy of banks.

“It repeals provisions for the CBK to deal with reckless lending by banks. Here you are as a regulator and you cannot control reckless lending. Then why are you in power? Why are you working as a regulator?” he posed.

The Banking Act is protected under Section 52 of the Banking Act, where conflict with any other written law applicable to an institution licensed under the Act are subordinate to it.

However, the expression “written law” does not include the Central Bank of Kenya Act, Income Tax Act, the East African Community Customs Management Act, the Value Added Tax Act or any of the other laws set out in Kenya Revenue Authority Act.

To go around this protection, the Bill now proposes the addition of the words “the Financial Conduct Act, 2018” which will effectively mean that in cases where the Banking Act conflicts with the proposed law, the former will play second fiddle.

Deletes section

The law deletes the entire Section 44 and 44A of the Banking Act, which are usually relied on to give guidelines on non–performing loans and how much banks can recover from customers. These provisions are transferred to the proposed Bill.

Njoroge says passing the Bill into law in its current form will limit the power of CBK to issue prudential guidelines to banks and also take away its power to place banks under receivership.

A source who did not want to be named fearing reprisals said the fight between CBK and the National Treasury looks too personal.

“If you look at the Bill, it introduces a parallel regulator, it sets monetary policy which is the primary work of CBK. The bad thing is that it is vague and doesn’t tell the market what basis they will be using to set rates and introduces bureaucracy,” the source said.

Njoroge has focused his legacy on disciplining the market, which he found rogue, speculators were running around prophesying the demise of the shilling and benefiting from the self-fulfilling prophesy, banks were running parallel audit books and collusion was common place.

As he set to clean his house, the governor may have overlooked the implication of his actions and backlash from the Government networks with connections to the rogue financial sector.

He clearly understands the ‘choices-have-consequences’ talk but he is daring those lying in mischief to make moves.

In the beginning, Njoroge had no tiff with the Government, save for the general advice to contain fiscal discipline, a preserve of the Treasury CS.

In 2015, when he was trying to deal with a devaluing shilling by tightening monetary policy, the governor jokingly referred to the Government’s expansionary budget and growing import pressures as speeding up a car when he was trying to slow it down.

“It’s like we have one arm firmly on the brakes and the other firmly on the accelerator,” he said.

In policy, Njoroge had also clashed with Rotich’s proposal to increase banks’ core capital to Sh5 billion which would have forced small lenders to close shop, merge or get acquired, saying he preferred a more diverse market.

Then he placed Chase Bank under receivership when President Uhuru Kenyatta was in Germany trying to woo investors. The Germans had a stake in the bank through German investment fund DEG, which is a subsidiary of KfW.

This was a test of independence where CBK could have shown it has a free hand over its sector and was almost achieved when Uhuru even spoke about his confidence in the Yale-trained economist in Germany.

However, in just three weeks, Chase Bank was re-opened under Kenya Commercial Bank in what was seen as pressure from the Government to avoid a diplomatic row with the bank’s foreign owners that also included the French through Agence Française de Developpement and the European Investment Bank.

First salvo

In August 2016, Rotich struck his first salvo when his proposal to have CBK and the Kenya Deposit Insurance Corporation (KDIC) consult the Treasury before seizing any bank was passed in Parliament, politicising the process and encroaching on the CBK mandate.

The governor may also have had another brush with the Government over a currency printing tender, with the State preferring long-serving UK firm De La Rue, in which it bought a 40 per cent in the local subsidiary.

CBK’s Director of Procurement and Logistics had in his professional opinion requested Njoroge to approve the application for sub-contracting by De La Rue International and for it to be awarded the tender.

Njoroge approved the request on November 29, which gave the currency printing firm a 15 per cent advantage that allowed it to clinch the deal.

The governor’s underbelly has been his nature in keeping a moral high ground and being averse to criticism that has isolated him from possible allies.

He has also surrounded himself with a communication coterie that do not answer press queries, imposed absurd conditions for access, and cut off interactions that have insulated the governor from the harsh realities of his real opponents.

While Members of Parliament have been close allies in his quest to police the financial sector, they have lately been singing a different tune.

Njoroge faced an antagonising House this year, especially on his position on the rate cap, when he was accused by the National Assembly’s Finance, Planning and Trade committee of conspiring with the IMF, the World Bank and lenders to amend the law under the pretext that it had stifled lending to private sector and small and medium enterprises.

“The issue of conspiracy is a serious charge. There was the narrative of banks colluding in the past to increase interest rates. That is not something we can condone,” he said.

“The CBK can’t be on the same side with banks because we are the regulator. If we do that we will be going against our mandate of supervising commercial banks,” he told the committee.

Treasury seems bold enough to ride this discontent at CBK’s inability to show a strong hand against banks to push for its own watchdog.

Njoroge also sees that there may be alliances with vengeful players in the financial market who still begrudge him for closing their rogue banks, and so want the powers moved to Treasury Building.

“It occurs to me that I have been warned about certain parties that lie in wait, poised for mischief, and that our actions have consequences. After all, this is Kenya. We are ready for that.”

With one year left on his four-year tenure, forces that have been out for his removal seem to be regrouping to ensure that if he survives another term he will not be as powerful and if he does not, he will watch his legacy trumped underfoot.

In 2016, refusal to bend the rules over the closure of banks found to have broken the law and action against 28 financial institutions involved in the multi-million-shilling National Youth Service scandal triggered huge pressure to have Njoroge removed.

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