Banking: Maybe it’s time we stopped putting all our eggs in one basket

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Golden eggs in different baskets. Image from http://www.farmersjournal.ie/don-t-put-all-your-eggs-in-one-basket-164832

The Kenyan banking sector prides itself on, among other services, financial inclusion which probably ranks better than other comparable markets such as Nigeria and South Africa. Financial inclusion makes it possible for consumers who would not access formal banking services to benefit from the services offered by financial institutions. Many consumers who have never banked before have been persuaded over the last few years to get bank accounts, invest in bonds and fixed accounts. With bodies such as Central Bank of Kenya (CBK) and Kenya Bankers Association (KBA), the sector has been running efficiently (or so we thought). Central Bank of Kenya ensures banks in the country comply with financial obligations and regulates the banking sector in line with the law. On the other hand, KBA ensures members comply with the best practice, act responsibly/ethically and bring costs down for the benefit of consumers.

Golden eggs in different baskets. Image from http://www.farmersjournal.ie/don-t-put-all-your-eggs-in-one-basket-164832
Golden eggs in different baskets. Image from http://www.farmersjournal.ie/don-t-put-all-your-eggs-in-one-basket-164832

Recent unfortunate events in some commercial banks have instilled more fear in depositors than confidence. In August, 2015, Dubai Bank went under. The CBK ordered closure of the bank following its failure to pay its debtors and for breaking regulatory rules. Two months later, Imperial Bank was placed under receivership over massive fraud- US $ 380 million could not be accounted for. On Wednesday, social media was abuzz with stories of yet another bank facing crisis.

Resignation of two officials at the helm of the bank’s administration only aggravated the matter. Thursday, CBK put Chase Bank under receivership. This alarmed depositors who rushed to make panic withdrawals only to be rudely shocked as they could not access their resources held with the bank. Technically, it is impossible for all depositors that hold accounts with any bank to get their money all at once. In fact, banks only have about 20% of all the depositors’ money at any point. To protect the interests of the depositors and other stakeholders, Chase bank will, for 12 months, be under KDIC (Kenya Deposit Insurance Corporation).

Looking at the crisis facing banks from different angles, this is what the receivership means:

Is this receivership a systemic thing?

In less than nine months, crisis at three different banks has called for the intervention of the Central Bank of Kenya. Banks being placed under receivership could be seen as the new norm, a systemic thing. The Central Bank governor, Dr. Patrick Njoroge, has come to the fore to array these fears and assuring Kenyans that the banking sector in the country is stable. These are isolated cases that do not necessarily represent the entire banking sector.

It’s time to clean-up the banking sector

Pundits and other financial analysts lauded the appointment of Dr. Njoroge saying he was a man who meant business. The CBK governor assumed office at a time there was continued weakening of the shilling against the dollar that saw it fall to about Sh. 100. The former advisor to the International Monetary Fund (IMF) has since made decisions aimed at the betterment of the country’s banking sector. In the previous regimes, commercial banks had their books checked and approved for the banks to report their performances within a short period. In this regime, it takes longer. Books are subjected to further scrutiny and this partly explains why it has been possible to point out what is ailing the sector. In the case of Chase Bank, top directors were recklessly awarded loans and there was no sufficient evidence that these loans could be recovered. Establishing this rot and working to rectify it is a step in the right direction when it comes to the clean-up of the banking sector.

Diversify your savings

Customers who put all their money in the proverbial ‘one basket’ have faced some difficult times since Imperial and Chase Bank went under. They have tried accessing their resources only to be greatly disappointed. Businesses have been affected and will continue as a result of this. Whether affected or not, it is about time you started to think of  diversifying your savings and investments. Hold accounts with different banks instead of having all your investments under one bank. That way if anything happens to your account at one bank you have some savings elsewhere to tide you over.

Customer confidence

The rot exposed at Chase Bank is enough to dent customers’ confidence when it comes to entrusting their money with financial institutions. According to Business Daily, one of the directors was given Kshs. 7.9 billion without security. Further scrutiny of the institution shows there has been insider lending to firms owned by some of the directors. If Chase Bank is not shut down, it will be restructured at the end of twelve months. The bank will face a difficult task of winning back the confidence of the average Kenyan who works hard and banks their money with the institution.

The turn of events in the banking sector in the country will make customers reconsider where they bank their money. It will hopefully also make banks to comply with regulations to avoid following the unfortunate path of receivership.

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