7th Jun, 2016

Kenya’s banking sector is facing a defining moment which holds a key to the industry’s catalytic role as a key driver of economic growth. Today, the sector finds itself in a rather critical mix of things with a buffet of factors converging to alter the state of play.

Smarting from a crisis of confidence arising from trouble in some of the banking institutions, the sector has ushered in a new era of self-regulation in a bid to boost ethics and governance. At the same time, a wave of game-changing financial services innovations continue to hit the market—redefining banking—as the industry’s role as an engine of economic transformation gains more traction by day.

Despite the hiccups recently experienced in the banking sector, especially over the past one year—where three banks have faced serious operational challenges—the sector is emerging stronger and is committed to streamlining how we do business sustainably.

Without a doubt, the financial sector remains one of the most regulated sectors anywhere in the world, and Kenya is no exception. It is important, and indeed necessary, that this should be the case since we hold our customers’ money in trust. There can be no greater responsibility than that entrusted on Banks. With a growing economy, and an expanding financial sector, new industry players have emerged to cash in on the growth trajectory that has been witnessed over the past ten years.

However, despite the successes, the issue of regulation of banks has come to the fore, with some stakeholders wrongly pointing an accusing finger at the Central Bank of Kenya for purportedly turning a blind eye on the on-goings in the banking sector. With the public confidence in the banking sector seemingly put to test, it is imperative that the industry looks for new thinking out of the box.

Charity, the saying goes, begins at home. This is why the Kenya Bankers Association (KBA) is laying a very strong emphasis on self-regulation among its members and entrenchment of certain operating ethics that will reassure our customers and provide future sustenance for the industry.

The introduction of legal standards is strongly determined by economic circumstances – when the economy is rising, the laws tend to be more lax, while an economic downturn makes it more probable that they will be tightened up. Particularly in times of crisis is the tightening of regulations rapid and thorough, which therefore behooves us to put in place mitigating factors for such adverse times.

It is in this light that KBA recently signed up to the “Code of Ethics for Business in Kenya”, a framework developed by the Kenya Private Sector Alliance (KEPSA), Global Compact Network Kenya and Kenya Association of Manufacturers (KAM) and endorsed by President Uhuru Kenyatta as a key initiative designed to address corruption and unethical practices within the government and private sector. KBA also announced plans to adopt a Self-Regulatory Framework and Conduct Standards for member banks during the Annual General Meeting to be held in June. Across the banking industry, all stakeholders are working with a shared objective—to protect and enhance the stability of the sector and to continuously raise the bar in terms of upholding the highest environmental, social and governance (ESG) standards.

The Code of Ethics sets out a common set of universally acclaimed principles applicable to all banks, over and above those that they subscribe to as part of their internal Code of Ethics, with a view to further develop the commitment of the banking industry towards its customers and the community at large through best ethical practices and with the aim of continuing to improve bank customer relationship.

The support for self-regulation comes from the concept of market as the most effective and rational mechanism for allocating resources, monitoring corporates and disciplining them if they underperform or engage in inappropriate conduct. We believe that the pressure from the corporate control market, capital market and the managerial labour market are the most powerful forces balancing the interests of managers and owners. Market governance is perceived as the best choice, because of institutional imperfections and the shortcomings of hierarchical governance.

The nature of banks as regulated institutions imposes special obligations upon a bank, its directors, officers and employees to respect and protect the rights and assets of others, whether customers, shareholders, other employees or affected companies. Through our umbrella body, KBA, we are looking directly to the respective Boards of Directors to establish, communicate and monitor the policies and standards of conduct within the institution that encourage integrity and the ethical values that foster acceptable business practices, and prohibit conflicts of interest and other violations of law.

The Central Bank Governor, under the leadership of Dr. Patrick Njoroge, has also recently launched a program to enhance supervision and governance frameworks for the industry. As banking sector executives, we welcome this proactive stance as it both incentivizes us to achieve the highest standards of governance and enables us to de-risk our operations. This should in turn, enable the public to rebuild their confidence in the banking sector in general and, moreso, have the confidence that lending decisions by individual institutions will be made on a transparent and sustainable basis.

I believe banks will win customers hearts and build their reputation by adhering to these new standards and embedding them both in the corporate culture and in their value proposition to customers.

Banks play a vital role in any economy, contributing to a country’s growth and development. In Kenya, there are several positive developments in banking that have been celebrated and will continue to be hallmarks of the industry, including progress towards the Vision 2030 financial inclusion goal; introduction of enhanced pricing transparency; promotion of SME finance; and enabling access to credit at the micro level.

The banking sector in Kenya continues to experience growth in terms of assets, deposits, profitability and products offering, leveraging on diversification to alternative channels, albeit in a tough operating environment especially towards the end of the Financial Year 2015.

I am optimistic that the banking industry is headed for better times ahead as stakeholders come together to consolidate the gains in the industry. We are glad that the industry regulator CBK is spearheading a multi-pronged growth strategy that I believe will make the Kenyan banking industry an envy by its peers.  We see the Kenyan economy bearing strong fundamentals for continued growth into the remaining part of the year driven by key industries like agriculture, manufacturing and tourism.

The Writer is the KCB Group C.E.O and Chairman of the Kenya Bankers Association.

By: Joshua Oigara