Business Daily (Nairobi)
30 June 2009
editorial
The report by the multilateral lender, International Monetary Fund (IMF), that three banking institutions in Kenya are living on the edge with regard to capitalisation levels calls for sober reflection on the state of our financial industry.
It is an indication that though everything appears bliss on the surface of the financial services sector, an incisive look into some aspects like loan defaults - a growing concern in a depressed economy - could unearth unwanted attributes that if not addressed would compromise the stability of the entire sector.
Granted, most bank customers hardly look at the capital adequacy ratios - the relationship between existing capital and assets in the form of loans.
But it is something that depositors need to take more interest in because it highlights what is recoverable in the event a bank collapses. Capital is always the cushion against losses.
The ratio must be read in the context of other ratios because even a bank that has a high CAR ratio may have problems with liquidity, one of the key causes of banking sector collapse globally.
An institution that is just above the minimum CAR and suffering from low liquidity should be a red flag to customers doing business with such a bank.
Many a time, institutions have collapsed without warning and depositors, especially those holding more than Sh100,000, find themselves in a precarious situation since the law only allows refunds of up to this amount.
Any amount above this comes from capital.
Liquidity has become an issue as well in recent times. With scarcity of funds in the interbank market, financial institutions have more often than not ended up using the reverse repurchasing orders (Repo) provided directly by the CBK as a quick lending facility.
Some industry insider reveals that banks themselves have a confidence problem with some of their own. Bank 'A' has doubt as to whether Bank 'B' will deliver on the contract if it lends it money.
Thus matters of trust have become uppermost among bank executives deciding whether to lend to another institution. The institution charged with ensuring that the system works properly is the CBK.
It needs to walk the institutions whose performance ratios could be suspect through a sustained and proper regime so that they do not pose any threat to the system as a way to enhance public confidence in banks.
The point is that the CBK should be quite aggressive in enforcing not just minimum requirements, but a strong banking system where the minimum levels are just guidelines rather than what some institutions have come to regard as best practice from year to year.
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