I was to learn that Kisumu County had already made a capital contribution of Sh100 million towards the proposed bank.
The County Assembly of Homa Bay recently made a supplementary budget allocation of Sh50 million as its first contribution to the shareholding of the proposed bank.
The plan is that each of the 14 counties involved in the project will contribute Sh200 million in capital subscriptions in two years.
The plan by governors from the Lake Victoria region to establish a commercial bank ostensibly to serve businesses and institutions within the 14-county economic bloc does not make economic sense to me.
First mooted way back in 2014, I had assumed that the idea of establishing a commercial bank for the lake region had been dropped.
I only came to realise that the governors were serious about this initiative the other day when the chair of the Lake Victoria region economic bloc and governor of Kakamega County, Wycliffe Oparanya, called a news conference in Kisumu to give an update on the progress made so far towards establishing the proposed bank.
I was to learn that Kisumu County had already made a capital contribution of Sh100 million towards the proposed bank. The County Assembly of Homa Bay recently made a supplementary budget allocation of Sh50 million as its first contribution to the shareholding of the proposed bank. The plan is that each of the 14 counties involved in the project will contribute Sh200 million in capital subscriptions in two years.
And the 14 governors have apparently decided to move with speed. Instead of establishing a brand new bank, they have now decided that they will purchase a licence from an existing bank.
They have come to the conclusion that a completely new bank would take too long to start operations. To emphasise their seriousness, Mr Oparanya disclosed that discussions and consultations had been held with relevant government authorities including the Controller of Budget, the Auditor- General and the Governor of the Central Bank of Kenya.
If I were asked to advise the governors I would urge them to drop the idea of purchasing a commercial banking licence. As we all know, commercial banks don’t lend out long- term money. Our banks don’t engage in what policy wonks call developmental lending and are at their best when giving short-term facilities such as overdrafts. Why is this the case? It is because a commercial bank is mainly funded by short -term deposits from customers.
When they take deposits they have taken on a short-term and lend it long- they are deemed guilty of committing the sin of asset mismatches.
Secondly, prudence demands that banks spread risks by lending broadly across sectors, clients and regions.
A bank that narrowly concentrates lending activities to a region will be deemed by regulators as having engaged in over concentration of risk. Which is why a prudent commercial bank will not expose itself too much to the lake region in terms of lending merely because it is owned by county governments within the economic bloc.
What is my point? It is that the commercial and economic fundamentals of a commercial bank are not in tune with the development objectives that the lake basin county governments are seeking to achieve. Instead of a commercial bank, why don’t the governors of the lake region consider establishing a Development Financial Institution (DFI).
An entity funded mainly by shareholder capital but that can also access capital markets by issuing long-term bonds is best suited for the developmental role the governors are thinking about. Indeed, the long-term lending sector in this country has been on its knees for many years.
The institutions we created to do developmental lending and to give our people long-term money at Independence- the likes of the Industrial Development Bank, Kenya Industrial Estates, Kenya Tourist and Development Corporation no longer function having suffered years of chronic underfunding.
This is the space that the proposed bank should fill. In any event- and even if the 14 counties were mobilised to fork out the capital, the amounts involved (Sh 2.8 billion) will only be enough to set up a fairly small bank with little capacity to make an impact.
In commercial banking, the size of your capital has implications on your single borrower limits and on parameters such as core capital to deposits ratio. In terms of scale, what is conceived is likely to be a relatively small player.
What will be more appropriate for the lake region economic bloc is a regional development bank funded by shareholder capital contributions, and grafted in the image of the proposed Kenya Development Bank that was proposed by the Presidential Task Force on Parastatal Reform .
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