By Matthew Magare

Through a press release dated 7th August 2020 the Central Bank of Kenya (CBK) announced acquisition of 90% of Jamii Bora Bank Limited (JBB) by the Cooperative Bank of Kenya Limited (Co-op Bank), effective 21st August, 2020.

JBB was established in 2010 following the merger of a bank and a microfinance institution. JBB was ranked 38 out of 39 banks in terms of market share in the period leading to its acquisition. According to published reports, JBB had been experiencing liquidity problems and was looking for a capital injection.

CBK active intervention to ensure the acquisition took place signals a pre-emptive approach by the regulator. It sought to strengthen the financial system by forestalling the risk portended by a financial institution in distress failing altogether. Signalling a proactive approach to the regulation of the financial sector.

Kenya has a vibrant banking sector comprising of 42 commercial banks, 1 mortgage finance company, 8 representative offices of foreign banks and 13 microfinance banks. The growth of the middle class and the adoption of technology to improve efficiency of financial services are drivers of continued growth, which according to a 2017 World Bank Report has averaged 7.7% over the last seven years.

Nonetheless, the banking sector has faced challenges over the years. The late 1980s and the 1990s saw 39 financial institutions fail. The banks collapsed due to reckless lending, mismanagement and wanton insider lending. The CBK took measures to strengthen its supervisory role through the implementation of the Basel 1 Accord Principles. Similarly, Parliament established the Kenya Deposit Insurance Corporation to address the losses suffered by depositors and undertake the resolution of failed financial institutions.

Even so, more banks failed over the last five years. Dubai Bank Kenya Limited and Imperial Bank Limited were placed under receivership in August and October 2015, respectively.

In response, the CBK issued a temporary moratorium on licensing of new commercial banks citing inadequate capacity to supervise existing licensed institutions. Shortly after, Chase Bank Limited, was placed under receivership on 7th April 2016. The CBK cited, governance and liquidity deficiencies as the reason for the bank’s failure.

The public lost confidence in the financial system leading to a bank run on other small and medium-sized banks. Following this bank run, 12 institutions would later be cited by the CBK in its 2017 Annual Supervision report, to have violated the statutory liquidity ratio requirement.

The CBK is often accused of regulatory forbearance. Regulatory forbearance is a regulatory policy implemented by central banks that permits banks and financial institutions to continue operating even when their capital is depleted. This inaction by the regulator sometimes leads to the collapse of the distressed financial institution. Regulatory forbearance is a moral hazard whose adverse effects are borne primarily by depositors and a blow to the public’s confidence in the financial system.

However, the acquisition of JBB signals active oversight by the CBK in forestalling bank collapse. CBK took an active role to ensure that JBB sought a tier 1 financial institution to acquire it so as to strengthen its balance sheet. Co-op Bank is ranked 3 out of 39 banks with a market share of 9.96%. Co-op Bank’s acquisition of the struggling institution may have a nominal benefit from a market share perspective. However, taking a long term view, the CBK’s underlying motivation was to foster confidence in the financial sector by avoiding a possible collapse of yet another financial institution. Co-op Bank was a responsible corporate citizen in this regard. In any event, a robust stable financial creates the stability required for sustainable profitability of players in the sector.