CBK supervision is key to a stable financial market
The Central Bank of Kenya headquarters in Nairobi. The appointment of bank directors must be solely left to the CBK. PHOTO | FILE
Banks are meant to operate on three pillars namely honesty, prudence and integrity. Application of corporate governance is therefore fundamental in carrying out bank operations in a transparent manner.
The Central Bank of Kenya (CBK) is the only body mandated to regulate commercial banks in Kenya. It is also charged with supervision and issuing operating licences to all banks. The guidelines are outlined in the Banking Act Cap 488.
Regulating banks simply means reducing the level of risk. When banks are controlled and supervised risk is kept to a minimal. Depositor funds are also safe and secure.
Regulation also reduces the risk of distraction which may result from adverse trading conditions.
CBK also regulates banks to protect banking confidentiality. Last year, two banks were placed under receivership. Dubai Bank became the first to be closed in September for contravening several banking regulations including failing to honour its debts.
Barely a monthly later Imperial Bank, another mid-sized bank, was abruptly closed for what the CBK termed as unsafe banking practises.
The bank was closed barely a month after raising Sh2 billion through a corporate bond. Depositors stand to lose close to Sh60 billion following the closure.
What preventive measures must be taken to avoid such occurrences?
Bank supervision
This simply means carrying out the checks on bank operations and reviewing the financial books of accounts. With the closure of two banks last year, the CBK will be fighting to restore public confidence and has already warned banks that it will be imposing more stringent supervision measures.
It has already sought help from the International Monetary Fund and the World Bank to hire consultants to advise on improving bank supervision.
“We see this year as the year of transition when we shall more aggressively supervise banks,” said CBK Governor Patrick Njoroge in his year-end briefing.
The CBK’s Director of Supervision has already been tasked with recruiting more officers with a biased for experienced bankers and those with an IT background.
Quality, experienced and well paid staff is the key to upgrading the supervision department and raising the standards of practise.
CBK audits
The CBK audit team must be equipped with skills to carry out extensive audits on banks’ financial books of accounts. The audit must also extend to IT systems and procedures. Emphasis must also be placed on operations, cash management and controlled stationery.
The method of sampling the lending book must be pegged to the size of the book and a cut off number determined. This means the risk level must be minimized to an extent that accounts falling below the sampling level will be insignificant in terms of numbers.
On the lending side, the audit must carry out a 100 per cent check on customer’s securities and have them physically verified. The securities represent the customer’s collateral used to secure their respective borrowings.
A detailed work programme must be used for both audits — advances and operations. A report must accompany the audit giving a standardised rating of the banks.
The rating should range from good to satisfactory, unsatisfactory and poor. Any rating below satisfactory must be followed up.
The CBK must then do a follow up audit in six months to establish whenever the issues raised have been rectified. Renewal of banking licences must be based on the audit.
Internal audits
Banks must also up their game by establishing internal audit teams to carry out similar audit exercises. The teams should work with the CBK audit team whenever it carries out audits.
Internal auditors must be professionals with vast experience in banking including IT systems. Bank’s IT systems must be foolproof and provide an audit trail of all accounts opened and closed on a regular basis.
Internal audit teams must have independent access the system to carry out random checks.
Emphasis must be placed on the lending book with checks on the status and conduct of major borrowing accounts.
External audits
All banks should appoint external auditors to carry out year-end audits on their financials. Rather than making this an annual routine, the CBK must change the way external audits are carried out.
Appointment of auditors must be with the approval of the CBK and reviewed annually. The same auditors should not carry out audits year in year out but be restricted to a three-year period.
In the event of any grave irregularity emanating from lax external auditing, the auditors should be held responsible. This way, external auditors will take their work with the seriousness it deserves.
Appointment of senior managers
The appointment of bank directors must be solely left to the CBK. All appointments should be based on merit, character, experience and the principle of value addition.
The person should also have reasonable banking experience and exposure to financial management.
The appointment of family members to boards should be restricted to two. This will reduce family influence on key decisions in running the bank. The CBK should introduce CEOs tenure of office to five years with an option to renew the contract for another five years.
The CBK should also approve the appointment of other senior managers including the Chief Operating Officer, the Corporate Director, the Credit Director and the IT Director.
The CBK should also approve appointments of key bank committee members. In most cases committee members are appointed from the board of directors and top management.
There are serious financial challenges ahead of us. If one more bank folds up in the new year it will have serious repercussions on the stability of lenders in the country.
Public confidence will be eroded and uncertainty will set in. I call upon Dr Njoroge to clean up the supervision department of the CBK and ensure that all banks operate within the guidelines set out in the Banking Act.
