How CBK boss has ushered in a regime change since taking the reins

The puzzle about Patrick Njoroge, the Central Bank of Kenya (CBK) governor, began on the day he sat with MPs and revealed that at nearly 53 years old, he was unmarried and owns virtually nothing in Kenya despite a “fat” Sh3 million monthly salary.

Even in their consideration of the amount as an annual pay, the MPs still wondered why the man owned “nothing” at his age, and appeared to favour holding hard currency in banks. But he stressed that his finances were not necessarily going to remain stagnant.

Later on, the puzzle, for some in the banking industry, turned into alarm when it was reported that the man who had been approved by Parliament to take charge of the country’s coffers had declined the trappings of office – a swanky residence in Muthaiga, top-of-the-range vehicles and the latest mobile phones.

It appeared that this would be a difficult man to deal with. If someone is not interested in money and the lifestyle associated with his office, then what does he want?

To address the critics, Dr Njoroge revealed that he was a member of a religious order that eschews a showy lifestyle, practises severe self-discipline and abstains from indulgence.

But time would tell whether he was such a difficult man to deal with, as critics feared.

Having cultivated the image of an ascetic, who lives like a Spartan, the perception that change was rife at the CBK was confirmed after Dr Njoroge took the reins at the financial sector regulator.

And so when Dubai Bank was put under statutory management and soon after quickly considered for liquidation in August, there were whispers that the fears some people had expressed were already being realised.

Matters came to a head when the regulator moved in and again closed Imperial Bank, only weeks after the closure of Dubai Bank. This was even before it become public knowledge that it was the bank’s directors who had approached the regulator with evidence of malpractice and asked him to close it.

The matter has taken a complex turn after some of the parties rushed to court, and any hopes of re-opening the lender as soon as possible – as the governor had envisaged – have been dashed especially after the announcement that depositors had started receiving refunds.

Questions could be asked whether the directors of Imperial Bank would have been so quick to report malpractices in the institution if they believed that the governor would look the other way or ignore the issue if another party to the matter “convinced” him otherwise.

After Dubai Bank was put under statutory management soon after Dr Njoroge took office, that was a not-so-subtle warning that the days were numbered for crooked industry players. It would not be business as usual and action would be taken against those who did not follow the law.

Today, analysts liken Dr Njoroge’s entry and performance to a regime change. They see the regulator as having gained more credibility.

“There has definitely been ‘regime change’ at the Central Bank. I think the governor’s religious mindset gives him outstanding and bullet-proof credibility,” said Aly-Khan Satchu, who runs Nairobi-based financial advisory and data vending firm Rich Management.

However, disentangling the Imperial Bank debacle has taught Dr Njoroge a lesson in the value of not counting the proverbial chicks before the eggs hatch.

Soon after it was shut, the CBK said that an agreed upon formula for restoring the commercial bank into operation had become difficult to implement because some shareholders were dilly-dallying on making good their commitments.

Within days some shareholders declared that they were not aware of any deal reached to re-open the lender, leaving the governor with egg on his face.

All along the CBK was apparently under the illusion that it could easily convince the owners and other prospective investors to put in more capital, have some of the deposits converted into capital and collateralise some of the unsecured loans to try restore normalcy.

But Dr Njoroge soon realised that things are not always what they seem.

For the regulator to get involved in corporate restructuring, the lesson from that incident was that what is on paper is not necessarily interpreted in the same manner by all stakeholders, and that managing people and their egos can easily turn out to be the most difficult part.

When Dr Njoroge took over, it did not take long before the shilling started to slide and by early September the problem had weakened further. Whereas many analysts recognised that there had been a long-standing current account deficit that made the shilling vulnerable on a daily basis, Dr Njoroge reckoned there were speculative elements in commercial banks.

To correct the situation, he re-issued a circular on forex trading limits in a bid to curb speculative trading, but this did not shield the shilling from pressure. He then invited chief executives of commercial banks and Treasury heads to a meeting where he urged them to behave responsibly.

At the meeting he said he talked along the lines of: “We realise that the currency is facing challenges from the large value of imports and we are not exporting a lot. But at the same time this challenge is being made worse by speculation. This is your country; why do you want to bring the economy to its knees? Why do you want to mess with the currency yet the fundamentals have not changed so drastically? You can make a profit now, but what if the currency problems turns worse and sinks the economy? Why don’t we all be responsible?”

If the previous governor, Prof Njuguna Ndung’u, ever used such moral persuasion in the currency crisis of 2011, it was never known or publicised.

Prof Ndung’u struggled to deal with the shilling’s crisis at a time when the construction of Thika highway was taking place and there were massive imports of materials such as steel for the project. This, apart from the current account deficit, was partly responsible for the shilling’s crisis at the time.

Prof Ndung’u has been celebrated both locally and internationally for his financial inclusion initiatives that have seen Kenya top in Africa with 75 per cent of the population formally included in the financial sector.

Prof Ndung’u was also well grounded in economic theory and monetary issues. He, however, had little patience with journalists who felt did not understand what he said and had reached a point where he did not accept to be interviewed on central banking if he felt that his point would not be grasped.

Sometimes he would refer impatient journalists and politicians – much to their chagrin – to journal articles and books that he had authored on the issues they would raise with him.

This was more so after he perceived the media to have failed to fully put forward his arguments about the reasons that precipitated the 2011 currency crisis that saw the shilling sink to an (nominally) all-time low of 107 units to the dollar.

Instead, he argued, some media outlets concentrated on the side shows and what politicians said.

However, Prof Ndung’u seems to have failed to strengthen the supervisory capacity of the central bank in a way that would prevent the kind of failures that were witnessed as soon as he exited the central bank.

In one published report, the International Monetary Fund (IMF) pointed out that commercial banks were under-providing for losses relating to non-performing loans. The IMF reported that banks had to adjust the loans losses upwards by Sh2.4 billion sometime this year after it was pointed out to them that they had under-provided.

Dr Njoroge recently emphasised that in the coming year, the CBK will drastically tighten the supervision of commercial banks. To start off, he asked auditors to look at the ICT systems used by banks to produce their financial reports.

On monetary issues, the governor now faces the task of keeping interest rates, the banking sector and the shilling stable. The current situation is only stable because of high interest rates, which is a major risk to economic growth.

But the governor knows that the risk will rise because fiscal policy tends to be expansionary in years just before elections. He is on record alluding to some disconnect between fiscal and monetary policies, noting that while the Treasury is increasing spending (accelerating), the CBK is forced to perpetually limit the increased money in circulation to stabilise the shilling and interest rates.

Dr Njoroge’s actions will be watched closely this coming year. People will probably forget the initial impressions if anything untoward happens at the CBK. The governor closely follows media reports relating to the CBK and the economy and occasionally personally takes issue with particular articles in newspapers.

“I will have to discuss that with you offline,” he will say to a reporter at a media briefing when concerned about a certain media story.

Mr Satchu believes that Dr Njoroge is equal to the task ahead.

“The central banker has been a bull outlier. From the moment he arrived, he has established his authority and in large part the recent out-performance of the shilling [last four months] has been based on his policy-making credibility,” said Mr Satchu.