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Eye on debt, cost of credit as CBK boss takes on term two

Central Bank of Kenya
Central Bank of Kenya. FILE PHOTO | NMG 

Within the first 12 months of taking office as the Governor of the Central Bank of Kenya (CBK), Patrick Njoroge faced several crises, including the collapse of three commercial banks—Imperial, Chase and Dubai.

His willingness to let undisciplined or wayward banks fall was the first thing that many people noticed about the new governor. It was not going to be easy for banks to misbehave. Not with a boss who did not believe in peddling influence.

“The governor managed the aftermath ( which included capital flight to larger Tier 1 banks) of the collapse of these banks well considering that it could have potentially triggered a banking crisis as the one observed in the early to mid-1990s,” says Renaldo D’Souza, head of research at Nairobi-based Sterling Investment Bank.

“He has further managed what is arguably the smoothest first acquisition of a bank in receivership (Chase Bank by SBM) with a plan that minimises losses to depositors. The focus of the governor has been on bank supervision to ensure that they meet prudential guidelines mainly related to liquidity, governance and banking operations,” says Mr D’Souza.

The career banker is seen to be keen on protecting rather than trampling on the rights of the customer. Disclosure of the total cost of credit, for example, improved.

“I think the governor has performed well overall. There is a lot more discipline in the banking sector today. Banks are much more careful,” said Eric Musau, who heads research at Standard Investment Bank. Mr Musau notes that this was something that had been nearly absent from the industry since the 1990s and had re-emerged.

But even after having to deal with the fall of three banks in the first year of his appointment, the crises facing the industry did not abate. Soon MPs passed the interest rate cap law and in September 2016, its application began. It was the probably biggest complication to Dr Njoroge’s role as the head of the central bank. It was going to be the challenge he would have to confront for the rest of his first term and even thereafter. Up to date, the rate cap remains in place, except with regard to the deposit rate.

There has been progress in the cases of Imperial and Chase banks. At the time of the collapse of the institutions, some felt that he had taken the role of disciplinarian within central banking too literally and too seriously. Even a law was passed that the CBK governor would not close any bank without the concurrence of the National Treasury. At the end of the day, even critics would concur that this helped to sanitise commercial banks.

At some point, legislators were out to increase the minimum capital for banks to Sh5 billion, ostensibly to ensure that Kenyan banks were big and able to expand as they withstood pressures such as liquidity and capitalisation. But Dr Njoroge argued that this could kill small banks and with that small and medium enterprises would have difficulty accessing loans. The governor’s argument carried the day.

The other issue that he has had to confront is the accusation that the central bank does let the foreign exchange rate float freely. What the CBK really operates is a managed exchange rate leading to an overvaluation.

Among the institutions that have put forward this thesis is the International Monetary Fund (IMF) which last year said the Kenyan shilling is overvalued by 17.5 per cent while the World Bank has said in the past that the local currency is overvalued by nearly double that figure.


Prof Francis Mwega, formerly a member of the CBK’s Monetary Policy Committee, has found the shilling to be just about five per cent overvalued. Dr Njoroge also does not believe the local unit is overvalued, stressing that the IMF has used the wrong method to arrive at its conclusion. Some analysts also take his position.

“We observe minimal monetary policy intervention from the CBK in terms of open market operations and use of forex reserves to manage currency fluctuations,” said Mr D’Souza adding that inflows have helped stabilise the currency amid declining oil and food imports.

For Dr Njoroge, it is a point of interest when he differs with the IMF because he previously worked with it in Washington and would have been considered to be generally in agreement with the institutions norms, procedures and other ways of doing things.

Differing with a critical calculation method is one of the few outstanding differences between him and his previous employer.

The IMF also has proposed that Kenya adopts a strict price level management regime called inflation targeting. Like his predecessor Njuguna Ndung’u, Dr Njoroge seems to believe that Kenya needs time to be able to change its current method to inflation- targeting.

Several countries in Africa, including South Africa and Ghana, have adopted the method with controversial results.

One issue that may be critical to adopting the method could be improved management of imported oil and food security.

The two take a huge portion of the inflation basket and adequate local reserves could leave the CBK to deal largely with the money supply-driven aggregate demand side of the inflation equation.

That is largely a fiscal side of the macroeconomic management, meaning that adequate tax and other resources have to be set aside for the reserves.

But Dr Njoroge has not clearly explained the CBK’s position. Though he has been active even on social media and calls the media after the MPC has made its decision, the clarity and directness with which he responded to emerging issues at the beginning of his first term seems to have reduced. He is much more circumspect, his statements or explanations more convoluted and basically more equivocal than at the 2015-16 period.

Even then, some analysts see Dr Njoroge as having managed inflation and other macroeconomic variables well so far, with stability marking his tenure. “I think he has managed the macroeconomic side of the economy well. We have seen inflation, exchange and interest rates fairly stable,” said Mr Musau. This is even as doubts are occasionally raised about inflation figures themselves.

“The CBK has done well to maintain the inflation within the National Treasury’s target range of 2.5 to 7.5 per cent. At no point has it breached the upper or lower limit. Questions must be raised however on the accuracy of the inflation figures,” Mr D’Souza says.

In terms of credit expansion to the private sector as well as smooth transmission of monetary policy signals, Dr Njoroge is largely seen by most analysts as having been hampered in this role by the rate cap.

“The CBK has been unsuccessful in influencing banks to direct credit to the private sector. He has also warned Government of Kenya against taking too much debt for reasons of long-term debt sustainability. Could he have done better? He has done fairly well but legislation has to a large extent limited CBK’s influence in determining credit provision,” says Mr D’Souza.


Mr D’Souza says that if he were to to give Dr Njoroge a score in terms of overall performance, he would get seven out of 10.

Mr Musau noted that the governor has also been quite keen on the role of fintechs, with the overriding question being how to accommodate the emerging innovations without disrupting the position they occupy in a constrained credit access environment.

But Musau notes that data and information from the CBK is not always as forthcoming as many would like. D

ata that is provided on a weekly basis is also viewed as heavily redacted.

For example, it lacks numbers on the extent of daily forex transactions, government securities rediscounted at the CBK, tiers (if not names) of the banks that borrow from the interbank market and reverse repo transactions.

On forex transactions— which does not tell whether the regulator bought or sold forex and indeed how much is of particular concern – other data users have raised the issue and the IMF, for example, have asked the CBK to publish the data regularly.

The CBK has also managed to control the cost of government debt thanks largely to the high demand for the instruments in a rate cap environment.

Dr Njoroge has asked the National Treasury to curb its appetite for debt because this has a direct impact on private sector borrowing.

The Treasury has been running fiscal deficits at 7-11 per cent in the past five years or so while the total public debt annual repayments is close to half of tax revenues even if below the threshold of 74 per cent of GDP that is set in the debt management plan.

But as a result of the CBK rejecting expensive bids at the weekly T-Bill auctions, the yields are in single digits with the 91-day paper at less than eight per cent.

In terms of employment and economic growth – which are not key mandates of the institution but are mentioned in the CBK Act as secondary targets – the monetary authority may have had limited impact in view of the lending rate cap that constrained the private sector access to credit as well a lack of jobs data.

The growth in private credit has been well below the double digit targets – probably a major reason the CBK hardly publishes its monetary policy targets any more.

“This is not a key mandate of the CBK but rather the GOK. Economic activity is largely being driven by GOK expenditure rather than being supported by the private sector through consumption and investment especially after the introduction of interest rate caps that has reduced credit provision to the private sector,” says Mr D’Souza.

Mr Musau says the challenge remains for the governor to increase access to credit because the institutions have the same business model, with only a few such as Chase Bank having a different model focused largely on SMEs.

“When you also take account of IFRS-9 (where debt default provisioning is done at the time of extending it), some of the banks won’t survive and will have to be taken over by the bigger ones,” he says.

Mr D’Souza says NPLs remains a critical issue. “His performance score would be based on how effectively he manages a potential growing asset quality (non performing debt) crisis. The average banking sector NPL is 13 per cent, the highest it has been through the last two governor tenures,” he says.

Mr D’Souza says Dr Njoroge’s second tenure will also face the challenges of the rate cap, increasing private sector credit, confronting corporate governance issues as well as lengthening the maturity profile of government debt.