End of an era as Ndung’u calls it a day at the CBK

Prof Njuguna Ndung’u retires on Tuesday as the governor of Kenya’s Central Bank, leaving a legacy of financial services regulation and monetary policy that market watchers have described as largely successful and progressive.

His tenure has not been without blemish – having weathered a series of scandals – but few could argue that Kenya made great strides in critical areas such as financial inclusion, the great and largely successful experiment with mobile money and the all-important stability of the banking sector.

It is no small achievement that no bank failed under Prof Ndung’u’s watch, an outcome that has been attributed to a more conservative approach to his regulatory obligations that more than once required lenders to boost their capital and adopt stricter credit approval processes.

There have been occasions when Kenya has experienced sharp currency fluctuations, strong inflation pressure and high interest rates that the governor has partly blamed on factors outside the control of the CBK.

Evidence that it was not all smooth for Prof Ndung’u comes from the fact that he is leaving under a cloud from the corridors of justice where he has been fighting allegations of occasioning taxpayers a Sh400 million loss through a flawed tendering process.

He is accused of defending the award of a Sh1.2 billion security tender to Horsebridge Networks Systems East Africa Limited.

That has not prevented analysts from describing his eight-year tenure as having been “filled with pragmatism, innovation and risk aversion”.

“No other central bank governor has done as much for financial inclusion in Africa,” said Razia Khan, the head of Africa Research at Standard Chartered Plc.

“Prof Ndung’u demonstrated what was possible with an open and innovative approach to financial sector regulation. His record hasn’t only been a relative success for Kenya; it is the standout African example of more rapid financial inclusion, too,” Ms Khan said.

That view is hinged on Prof Ndung’u’s decision early in his tenure to allow the rollout of Kenya’s first mobile money transfer service M-Pesa amid protests from banks.

Freeing people from the need to hold bank accounts that had high maintenance and transaction costs, M-Pesa a product of Kenya’s largest telecoms operator, has been an instant hit growing in an exponential fashion over the years.

READ: Kenya’s mobile money transfers up 25pc to Sh2,400bn

Other operators, including Airtel and Telkom Kenya introduced their own mobile money services, deepening the uptake of the platform that offered greater convenience and reliability compared to use of couriers and postal services in person-to-person cash transfers.

Mobile money transactions hit Sh6.7 billion per day – equivalent to 3.8 per cent of GDP – in November last year having grown from Sh3.2 million per day in April 2007.

The growth, at 159.4 per cent compounded annually, is all the more remarkable given the low levels of fraud over the same period.

Thanks to mobile money, the percentage of the Kenyan population excluded from financial services dropped from 38.4 per cent in 2006 to 25.3 per cent in 2013. M-Pesa, Airtel Money and Orange Money, among others, have contributed significantly to bridging that gap.

Banks have since come around, to partnering with the telecom firms to offer mobile money services that have become a must-have in retail banking.

Bank depositors will breath easy for not suffering from a bank failure during Prof Ndung’u’s term. Large depositors, in particular, should feel grateful since they stand to lose their shirts should any bank collapse with their money.

The CBK says the Kenya Deposit Insurance Corporation now has enough surpluses to cover 96 per cent of all deposit accounts that have grown from 3.5 million in 2007 to over 25 million currently.

The covered accounts have up to Sh100,000, which is the maximum amount guaranteed by the government in case of a bank collapse. This level of stability is the product of higher capital requirements and stricter supervision of the lenders in the past eight years.

Prof Ndung’u has particularly won admiration for cushioning the local banks from the 2008 financial crisis, a contagion that bankrupted several Western banks.

“At the onset of the crisis, CBK’s banking supervision department stepped up supervision to detect any immediate stress in the system,” the International Monetary Fund (IMF) said in a previous report on Kenya.

“Commercial banks introduced stricter appraisal of new credit facilities, coupled with close and continuous monitoring of existing credit portfolio.”

Robert Bunyi, an analyst at Mavuno Capital, said CBK’s stabilising force in 2008 was even more important given the context of the post-election violence that would have exacerbated external shocks.

“Prof Ndung’u was the steady hand at that critical time,” he said in reference to the absence of runaway inflation and high interest rates in that troubled year.

ALSO READ: Ndung’u tenure as CBK governor ends Tuesday

Prof Ndung’u however came under harsh criticism three years later when inflation rose to a new record as the shilling depreciated against major currencies.

The cost of living worsened to 19.72 per cent in November 2011, driven mainly by food shortages and the steady depreciation of the shilling to a low of 107 units to the dollar.

The high-cost environment was painful for households, businesses and taxpayers as the CBK sold short term bonds with coupons of over 20 per cent to offer investors real returns after inflation.

A parliamentary report accused CBK for moving too slowly in reacting to the national currency’s depreciation, among other causes of the slump.

But Prof Ndung’u defended the bank against this accusation, arguing that monetary policy is no panacea for inherent structural weaknesses in the economy, including trade deficits and supply-side shocks.

The outgoing governor leaves the exchange rate at 92 units to the dollar, having taken office when it traded at 67 units to the greenback.

On the corruption charges against Prof Ndung’u, Mr Bunyi says it was not possible for anybody to serve in high office and leave without such accusations.

“It is getting to a point where it is impossible to take up a major public appointment and not face allegations of corruption – false or not,” Mr Bunyi said.

Besides this controversy and the achievements on the monetary policy front, the outgoing governor will also be remembered for boosting the bank’s transparency, including publication of quality and detailed statistics on various aspects of the economy.

The information flow seen during his tenure has proved useful for researchers, the press and the general public. Observers attribute the thorough research culture to Prof Ndung’u’s academic background.

His predecessor, Dr Andrew Mullei was the other governor with strong academic credentials.