15/03/2021 by Ochieng Oloo 0 Comments
RESPONSIBLE BANKING IN A NEW ERA
The push for banks to do business more and more responsibly has been a long time coming.
It is no longer just about CSR (Corporate Social Responsibility). The concept of ESG (Environmental, Social and Governance) factors in measuring the sustainability and social impact of investment was first coined in 2005.
Then last year, the UN led an initiative involving 130 banks in 49 countries that set forth six principle that banks globally are expected to adopt that provide a framework for a globally sustainable banking system with the objective of helping banks to demonstrate how they make positive contributions to society. Our own KCB was one of the 30 founding banks of this initiative.
“ As society’s expectations change, banks must be transparent and clear about how their products and services create value for their customers, clients, investors, as well as society. The Principles for Responsible Banking help any bank – whatever its starting point – to align its business strategy with society’s goals,” the UNEP Finance Initiative, the movers of the project says on their website.
In 2013, the Kenya Bankers Association led an initiative that put together what they called a Sustainable Financial Initiative that set out principles for sustainable development that would guide Kenya’s banking sector under Vision 2030. In 2015, the sector adopted the principles and adapted them for an e-learning platform that has been used to train more than 25,000 bankers.
Last year, the Central Bank of Kenya issued a Banking Sector Charter (BSC). It became effective from 1st March 2019 and banks were required to submit their implementation plans by 31st May 2019.
“The Charter represents a commitment from institutions in the banking sector to entrench a responsible and disciplined banking sector cognizant of, and responsive to, the unique socio- economic realities of the Kenyan populace,” says the preamble.
It points out that it seeks to address the concerns of the public regarding the high cost of credit and the poor quality of customer service provided to the public by the banks.
The charter highlight 4 central pillars upon which it is hinged, that represent the vision of the banking sector in Kenya namely:
Adoption of customer-centric business models by banks;
Risk-based credit pricing;
Enhanced transparency and information disclosure;
Entrenching an ethical culture in banks – doing the right thing.
Even now that the Banking Sector Charter (BSC) compels banks to use credit scores for pricing risk, there is still no enforcement.
Responsible banking dictates that customers should have access to all the necessary information about a banks products and services, including the charges, that help them make informed decision. The BSC also commit banks to exercise fairness by ensuring that all products are developed in line with the Risk Management Guideline on Credit Risk Management as well as Prudential Guideline on Consumer Protection. They are to highlight key features like type of product, costs, target clientele, risks, rights and obligations of the parties and legibility and simplicity. These are to be placed on their websites and available in their branches.
To enhance transparency, all commercial banks are required to upload their respective internal and external fees for all products on the cost of credit website to enable customers make rational financial (product) decisions. Failure to do so will result in administrative sanctions. These measures should help alleviate the information asymmetry in the banking sector, that has completely relegated the consumer to a price taker.
The charter acknowledge that banking services and products have become sophisticated, thus there is a need to extend financial literacy programmes to customers in order to ensure proper use of the available banking services and products. Under the charter, banks are therefore required to facilitate technical assistance through appropriate financial literacy programmes to customers in the Micro, Small and Medium Enterprises (MSMEs) sector so as to improve financial knowledge.
But as we highlight these land mark achievements, we need to access if we are stretching ourselves too far before we deal with the underlying issues afflicting our own banking system in Kenya in as far as responsible banking is concerned.
Social media is rife with stories of customers being defrauded by bank employees. There was a recent story on face book of a customer of a reputable bank who went to withdraw US$5,000 only to discover when he got home that he had instead been given 50 notes of US$1 denominations amounting to US$50. I have also seen several stories of people who were defrauded on the numerous digital payment platforms and their banks became ambivalent as to whether the customers we telling the truth or not.
When such cases are reported to the banks, more often than not they are ignored. The BSC now has guidance on complaint handling. Banks must acknowledge complaints received from customers with in 48 hours and resolve them within 7 days. If not resolved in 7 days, then the customer must get a progress update every seven days.
It is a new era where technology is a sine-qua-non of banking.
Granted there is a steep learning curve especially for the customers but some of the incidents we are witnessing reek of negligence on the part of the banks. Why for example can’t a bank be responsible enough to ensure that the CCTV cameras capturing tellers as they serve their customers are working properly. Many banks absolve themselves from blame whenever a customer looses money on the digital platforms claiming the customer must have given their password to the fraudsters and the story ends at that.
I have an account in one bank where whenever a substaintial amount of money is deposited, I start receiving calls from fraudsters claiming to be calling from the bank regarding a problem with my password or ID. How do these fraudsters know that I have deposited money?
Lest we forget, the major reason for the enactment of the interest capping law in Kenya in 2012 was the greed exhibited by a majority of Kenyan banks that saw them hike rates to unpalatable levels. While banks competed on who would report the highest profit growth many Kenyans were left reeling under the weight of their debt burdens. Many businesses closed and bad loans in the banking sector soared.
Perhaps I should ask; Why are Kenyan banks still not charging their customers rates based on their risk profile? The initial purpose of Credit Information Sharing (CIS) for banks, that commenced in 2010 was to improve collections. Because customers fear being listed, they are more amenable to honoring their payment obligation on time. Indeed this has helped improve collections for banks
But what has it done for customers? Kenyan banks have been providing full file information on their borrowing customers to the credit bureaus for four years now so there is enough data to tack customer risk profiles but the sector has not moved on the use this information to price customer loans based on their risk profiles. In fact bureaus now provide banks with a PPI (Payment Performance Index) score. The banks however prefer to solely look at whether one is listed or not when appraising loan applications.
The Central Bank of Kenya, the regulator, previously argued that the rating system in Kenya is not yet mature, but that was four years ago.
The repeal of the three year law capping interest rate in November last year, came as a big relief to the banking sector and the economy as a whole. However, it is imperative that we ensure we never go back there.
The central bank has been quite categorical on banks keeping interest rates low, in fact, threatening to whip any bank that increases its rates. When one bank attempted to do so soon after the capping was removed, it was prevailed upon to rescind the move barely hours after. In short, while interest rates are no longer capped in Kenya, the big man is not using moral suasion, he walking around with a stick looking out for whoever seeks to raise this ugly head.