Preventing Failure Of Commercial Banks In Kenya: An Analysis Of The Supervisory Role Of The Central Bank

Abstract

The importance of a stable banking system in any country cannot be sufficiently underscored. This is especially true in light of the increasing complexity of banking business, and the centrality of banking to the performance of economies. The banking sector in Kenya has grown from one having a few colonial-era banks to having a robust array of local banks that are spreading their operations regionally. However, the Kenyan banking sector has over time been faced with occurrences of bank failure that were initially systemic and are now becoming individualised. Some of the reasons for the failure of banks in the nascent industry in the 1980 and 1990s keep re-occurring in present day. This is despite an enabling legal environment for the bank supervisor, the Central Bank of Kenya (CBK). This has led to the need to re-evaluate the mode of supervision taken by the CBK and its application of the law. This study looks at the various phases of bank failure in Kenya and the documented causes. It also looks at the legal framework under which the CBK operates. Lastly, the study interrogates the methods of supervision taken by the CBK. It further looks at the methods of supervision that have been used in other jurisdictions such as the USA, Malaysia and India and compares them to the methods applied by the CBK. Consequently, the study establishes that the problem does not lie in the legal framework for bank supervision, but rather in how the supervisor goes about its implementation. The method used is found to be backward-looking and deficient in light of the nature of the sophisticated banking sector yet the progressive method is available but side-lined. The study therefore proposes that the CBK improve on its current method of supervision (CAMELS) while at the same time phasing in a better method (RBS) that has been proved progressive and more effective in other jurisdictions. This is to be done with a view of eventually implementing a total migration to the RBS approach to banking supervision.