As Dr Patrick Njoroge exits the Central Bank of Kenya (CBK), he leaves behind a mixed legacy, and this can probably be best looked at through the lens of the core functions of the apex bank, namely price and financial stability, monetary policy formulation and national payment systems.
On financial stability, which is a condition in which the financial system is generally stable, he had to go through a curve.
Two months into his first term, he shut down a little-known Dubai Bank. But two months later, he would face his first real test when he closed Imperial Bank, a medium-sized lender.
Six months later, in April 2016, he had to deal with another bank failure in the form of Chase Bank, another SME-focused medium-sized bank (an action which caused ripples in the market).
Overall, he didn’t do a good job with the two failures. His explicity with communication in the initial stages created a crisis of confidence in medium-sized banks.
For instance, in the wake of the collapse of Chase Bank in April 2016, there was an immediate flight to safety which saw the smaller Tier III banks lose Sh17.8 billion (c.USD 175 million at the time) in deposits by the close of Q2 2016.
Perhaps a curatorship of banks facing a run on deposits rather than direct regulatory seizure as a means could have averted the flight.
Even the subsequent liquidation of some of those banks remains unresolved up to today. However, he would later change tact when three banks, namely Fidelity Bank, Jamii Bora Bank and Spire, faced significant liquidity headwinds.
In this case, he opted to curate the three and later sold them to other banks, thereby avoiding spooking the market.
On monetary policy, there was a general lack of policy signalisation and innovation.
When it comes to monetary policy, language and communication are core policy tools and offer a platform for any central bank to reinforce credibility in financial markets.
The governor often missed this and the monetary policy communique has been too lagging and offers little clues on forward guidance.
Additionally, full transcripts of any meeting of the monetary policy committee, including personal statements of monetary policy committee members, were never made public throughout his tenure.
In July 2021, the bank released a white paper in which it envisioned what it called a forward-looking monetary policy approach, away from the current monetary aggregates targeting approach (which has been in place since the substantial amendment of the Central Bank of Kenya Act in 1996).
In the forward-looking approach, the CBK makes public a numerical inflation target and then takes appropriate measures to steer inflation outcomes towards that target.
While it could be a good foundation for strengthening policy signalisation, it is still unclear when the paper will be adopted.
There was, however, success on the (consumer) price stability front. Being a small open economy, Kenya’s inflation is largely imported, which makes the exchange channel, as a policy transmission channel, the most significant.
For instance, a tight monetary policy makes domestic assets more profitable vis-a-vis foreign assets, resulting in capital inflows, thereby appreciating the exchange rate.
This makes imports cheaper, thus easing inflation. The governor’s active management of the exchange rate channel provided stability for the most part of his tenure.
On national payment systems, CBK has the mandate of establishing, regulating and supervising an efficient and effective payment, clearing and settlement system.
His success on this front has revolved around entrenching cashlessness. At the onset of the Covid-19 pandemic, there was a downward review of pricing structures for bank-to-mobile wallet transactions to encourage cashlessness. There was also the full interoperability of mobile money services.
The bank, in February 2022, launched its 2022-25 national payments strategy which outlined plans to extend existing payment rails (as well as adoption of new emerging technologies).
However, the bank’s flexibility will ultimately be measured by its tone towards the potential adoption of a digital currency, which, as per the governor, was largely out of bounds.
The bank did issue a white paper on central bank digital currencies, which it did for fear of missing out on the conversation, but no concrete roll-out plans.
The writer is a thought leader.
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