CATHOLIC UNIVERSITY OF EASTERN AFRICA

FACULTY OF LAW

NAME: DICKSON CHUMA

REG NO. 1027529

UNIT TITLE: LAND LAW II

UNIT CODE: CLS 307

LECTURER: MR FELIX ODHIAMBO

DISCUSS THE CHALLENGES THAT AFFECT THE BANKING INDUSTRY IN
KENYA AND PROPOSE POSSIBLE SOLUTIONS TO THE SAME, NOTING HOW
THE PROPOSAL COULD FIT INTO ANY REGULATORY SHOT COMINGS.

Kenyas financial system is the largest and most developed financial system in East Africa
and it has a notable improved stability over the years but however it is still facing quite a
number of challenges. These challenges include regulatory pressure, non-performing loans,
corruption, fragmentation and ineffective leadership, political interference to mention but a
few.

Regulatory requirements continue to increase and banks need to spend a large part of their
discretionary budget on being compliant, and on building systems and process to keep up
with the escalating requirements. The passing of the 2010 constitution of Kenya brought
about a number of new regulatory requirements in the banking industry. For example, the
Central Bank of Kenya requires financial institutions to build up their minimum core capital
requirement to Kenya shillings One Billion.

Another major challenge is in regards to the issue of interest rates capping law and how that
law is affecting the profits of financial institutions in the country. Just after the signing of the
interests rate capping bill into law, the impact has started coming out as it is witnessed by the
2016 full year results for some banks that have released their results. It was noticed that on
the first day of the effectiveness of the same law, commercial banks performed dismally in
history of banking on the stock market.

Increasing competition from financial technology companies is another challenge being faced
by the banking industry in Kenya. Financial technology companies are usually start-up
companies based on using software to provide financial services. The traditional banking way
is being disrupted by the increasing popularity of financial technology. This creates a big
challenge in technology, operation, culture, and other important facets of the banking
industry. For example Western Union and MoneyGram, are well established non-bank
providers. By so doing various factors are coinciding which look set to fundamentally change
the landscape of the retail payments market, and in ways that threaten banks dominant
market position.
Another factor that is affecting the Kenyan banking industry is social media. The Kenyan
banking industry is operating in the epoch of social media and despite the fact that it is useful
in building brands, if misused, its effects are lethal as far as banks are concerned. For
instance, Chase Bank has already faced the pain of misused social media platforms. It went
under receivership in 2016, in what the central bank Governor Dr. Patrick Njoroge referred to
as the rumours peddled across social media platforms. The rumours on social media caused
panic among depositors and investors alike who took to mass withdrawal of their money from
the institution which compromised its financial well-being.

Fraud is one of those factors that persistently continue to wreck the Kenyan banking sector.
Due to rampant fraudulent activities, the Kenya Revenue Authority is broadening fraud
related investigations to include the National Bank of Kenya, Commercial Bank of Africa and
Cooperative back of Kenya for corruption and tax evasion. On August 14, 2015 the Dubai
Bank Kenya went under and was put under receivership. It was alleged that the bank had
failed to pay its debtors, abetting fraud and stealing clients funds.

These above aforementioned corruption activities were also noticed in 2006 two major
scandals in the government which led to resignation of three Ministers. Despite several
government measures to fight corruption, the efforts have not had a significant impact. The
problem of corruption remains a major hindrance to the well-being of the banking industry in
Kenya while at the same time affecting the confidence of investors and customers.

An external force in form of political interferences also plays a major role in the Kenyan
banking industrys challenges. For instance political leaders use their positions in the
government to borrow from the banks without repaying the loans, a problem that led to
increased non-performing loans. According to Brownbridge (1998:16), most of the larger
local bank failures in Kenya are as a result of extensive insider lending often to politicians.

Poor leadership another factor posing challenges to the banking sector or industry in Kenya.
A number of studies have indicated that lack of leadership continues to be a major challenge
for most banks. Donnelly (1994:12) pointed that those involved in banking management lack
skills required for effective banking. According to Sokpor (2006) and Kinyua (2006), failures
of private banks in Kenya is mostly as a result of poor management and governance, and thus
poor leadership, the importance of effective leadership in ensuring that banks attain their
goals cannot be neglected, as it is central to effectiveness and good performance.
Possible solutions with regards to the above challenges facing the banking industry may
include strengthening the banking sector regulation. The government of Kenya should
establish banking industry reforms that enhance competition, while enforcing mechanisms
that exposures to risk of corruption or fraudulent activities. In case of corruption the
government must strengthen legislation that prohibits such activities in a manner that there
will be more room for inspection in the banking sector in order to avoid corruption activities.

In regard to poor management, banks should ensure that they their management personnel is
equipped with and practice good corporate governance and follow sound prudential
guidelines to ensure longevity of operations and safeguard of shareholder resources.

Relaxation of some stringent regulation that act as hindrance to the smooth functioning of the
banking industry in Kenya such the recently ascended bill concerning interest rates capping
which resulted a notable reduction of profits as far as banking business is concerned.

In conclusion, it can be argued that the banking industry in Kenya is faced by a number of
strong challenges and improvement technologically and strengthening legislation relating to
the banking is necessary.