LLB (Hons), BA International Relations
CHAPTER ONE
1.0. INTRODUCTION
1.1. BACKGROUND
The term ‘corporate governance’ refers to the structures and procedures adopted to direct and manage a business and operations of a company.[1] Disclosure describes the extent to which a corporation's actions are observable by outsiders through transparency by the corporate entity.[2] The main social benefit of required disclosure is its influence on corporate governance.[3] Transparency is one of the key tools to corporate governance and ensures that management will not engage in improper or illegitimate behavior since their conduct can be and will be examined.[4]
Good disclosure about corporate governance practices gives investors a concrete understanding of how decisions are made that may affect their investment.[5] Corporate governance is at the forefront of establishing standards of corporate ethics aimed at reducing crooked practices while preserving a fair business environment.[6] It is also increasingly being considered an important part of enterprise risk management as poor corporate governance is viewed as risky, whereas good corporate governance (GCG) is a sign of strength in a corporation.[7]
Governance in Banking is less about numbers and more about people.[8] In most cases, Banks declare bankruptcy and are placed under receivership or statutory management as a result of individual arrogance, greed and recklessness.[9] Those charged with the responsibility to lead the journey to financial freedom, are abusing their powers for personal gains at the detriment of uninformed depositors.[10] It is a worldwide problem that has been the center of financial crises for close to one hundred (100) years now.[11]
Certain banks created debt that they were unable to pay when they fall due for example Chase Bank Limited(Chase Bank), whose directors awarded themselves hefty insider loans and when suspicions hit the media about this very discrepancy, there was an immediate run forcing the bank to shut down due to liquidity problems.[12] To avoid being exposed, such banks conceal their debt through fraudulent means all the while keeping the person who is supposed to be the ultimate beneficiary in the dark.[13] A Kenyan branch of the international audit firm Deloitte Touche Tohmatsu Limited(Deloitte), who acted as Chase Bank’s auditor, offered a qualified audit opinion on the bank’s finances which meant that either the bank furnished its auditor with information that was limited in scope or it did not meet the requisite accounting standards.[14] This was an example of just one out four banks in Kenya in the period between 2015 and 2016 that faced public as well as legal probe into their corporate practices.[15]
The Kenyan Banking Industry was under siege in the period 2015 to 2016. Two well-known mid-tier lenders, Imperial Bank Limited (IBL) and Chase Bank Kenya Limited (Chase Bank) were placed under receivership.[16] National Bank of Kenya (NBK), whose major shareholder is the Government of Kenya, suspended its top executives and towards the end of 2016 appointed new ones.[17] The fourth, Dubai Bank Kenya Limited (Dubai Bank) had an order of liquidation delivered against it by the High Court of Kenya.[18] Directors of the said banks were accused of conducting, albeit clandestinely, unethical and to some extent, unlawful transactions to enrich themselves at the expense of their unknowing depositors. For example the Governor of the Central Bank of Kenya, Mr. Peter Njoroge confiscated prime properties of land irregularly acquired by Chase Bank board members as well as fifteen year interest free loans they had awarded themselves under the guise of sharia compliant lending.[19]
The argument made in this paper is that the reason behind the chaos in Kenya’s banking sector is insufficient legal mechanisms regulating corporate governance. This is a result of the inadequacies of the legal and institutional framework in fostering moral conduct so as to prevent unlawful or unethical practices by bank managers and directors.
The conduct of corporate directorship is within the ambit of the concept of corporate governance which is concerned with the social political and legal environment in which corporations operate.[20] In order to establish a stable financial sector, all relevant members of society need to be made aware of how corporate governance in the banking industry operates.[21] This provides checks and balances through monitoring mechanisms of which disclosure is the most essential.[22] Disclosure can improve corporate governance in imperative ways. Certainly, improving corporate governance and not investor protection, provides the most persuasive validation for imposing on financial institutions the responsibility to provide constant disclosure.[23]
With the appointment of new CBK Governor[24], Dr. Patrick Njoroge, on the 19th of June 2015, a number of institutions were penalized when it became public knowledge that directors and owners of banks were taking advantage of their clients.[25] In fact, the Governor was praised for his character with his religious beliefs being credited as the reason for his competence.[26] Seeing as public discourse on banking regulation delved into the personal beliefs of its stewards, it was necessary to have a discussion on how the law had incorporated ethics in corporate governance practice.
This dissertation therefore seeks to evaluate the legal challenges that contribute to the practice of corporate governance disclosure specifically in the banking sector in Kenya. The study examines literature by both local and foreign scholars on the subject matter as well as statutory instruments and institutions that regulate the financial services sector in Kenya. It uses the examples from the banking sector in Kenya as case studies drawing comparisons from other jurisdictions not only to emphasize the need for corporate governance disclosure but also as an attempt to unearth the major causes of the problem.
1.2. STATEMENT OF THE PROBLEM
Kenya’s legal and institutional framework regulating the banking sector is characterized by certain challenges that limit its regulatory competence. As a consequence, it has failed in its mandate to guarantee proper governance of banking institutions. Therefore, there needs to be appropriate articulation of the disclosure principle as well as the virtue ethics theory within the regulatory framework. These will act as incentives for good corporate governance practices (GCG) and will give rise to a stable banking system.
1.3. JUSTIFICATION OF THE STUDY
The financial sector operates in an atmosphere rampant with asymmetry of information. As will be discussed, very little research has been done on corporate governance disclosure in developing countries such as Kenya. This study helps grow society’s knowledge, understanding and general interest in the subject matter. The more society is aware, the more incentive there is to modify the legal framework on corporate governance disclosure. It is a step forward towards a transparent and accountable banking system.
1.4. RESEARCH QUESTIONS
This dissertation’s objective, as already mentioned, is to analyze the asymmetry of information that has characterized Kenya’s banking practice. By doing so, it will highlight the importance of corporate governance and how the tools of disclosure principle and virtue ethics theory are instrumental for GCG. In so doing, the following questions will be addressed:
1. What is corporate governance disclosure and why is it important?
2. What is the current legal and institutional framework governing corporate disclosure and transparency in the banking sector?
3. Is there a need for legal reform on corporate governance disclosure requirements and what reforms can this study recommend?
1.5. HYPOTHESIS
This dissertation proceeds on the assumption that proper disclosure guarantees good corporate governance practices which in turn results in a stable banking system.
1.6. RESEARCH METHODOLOGY
The method used to gather information for this dissertation will be through the use of desktop research. The internet research will analyze the legal and institutional framework, both municipal and international, provided for corporate governance and disclosure as well as literature in the form of journals, article and conference papers on the same. This research will be based on the case study and its main objective is to prove the hypothesis. There is limited access to books on the subject matter of corporate governance within the jurisdiction of the study hence the internet the most suitable and convenient source of material.
1.7. LITERATURE REVIEW
The literature review commences with a discussion of the concept of corporate governance, its objectives and importance to the proper functioning of financial intermediaries such as banks. Mohd Sulaiman and Bidin defined corporate governance as an expression used to describe how companies are directed and managed.[27] Rezaee defined corporate governance as a process used by shareholders to induce management to act in their interest providing a degree of confidence.[28]
The proliferation of scandals and crises arising from poor corporate governance strengthen demand for GCG to ensure long term sustainability of corporations.[29] An entity is more likely to achieve better results when corporate governance practices are given prominence within the organization. Conversely, firms with poor corporate governance schemes are more likely to underperform in the long term.[30]
The second subject matter in examination of literature is on the topic of disclosure of corporate governance. Fox justifies disclosure as a necessity to protect investors from making poor trading decisions as a result of being uninformed.[31] Similarly, Louis Brandeis commends publicity as a remedy for social and industrial diseases.[32]
The third concept discussed is the purpose the banking industry serves in developing economies such as Kenya’s and linking those purposes to GCG to further improve its role in society. The corporate governance of banks in developing economies is important for several reasons. For example banks are the major source of finance in economies whose financial markets are not so developed providing the most suitable modes of payment.[33]
The final analysis on literature concerns the legal arguments attesting to the features of good disclosure law. Katonya argues that over the years concerns have been raised about inadequate corporate governance standards and poor performance at the Nairobi Securities Exchange[34], the sole securities market in Kenya.[35] This shows that the issue is not characteristic to banking alone but to the entire financial industry. It should be noted that the entire literature will be inferred within the theories pertaining to corporate governance which will be expounded on in chapter two of this dissertation.
1.8. CHAPTER BREAKDOWN
This dissertation shall constitute six chapters. Chapter one shall serve as the introduction providing the background, statement of the problem, research questions, the hypothesis of the study, justification of the study and a review on the various arguments by scholars. Chapter two focuses on the various theories of corporate governance extrapolating the themes within literature and applying them to the context of this dissertation. Chapter three will highlight the legal and institutional framework governing the banking industry in Kenya. It will extrapolate the provisions that specifically deal with corporate governance disclosure. Chapter four will go on to analyze case studies that are pertinent to the present discussion giving a comparative analysis between Kenyan and US banking crises. Chapter five is the consolidated summary of the entire work to tell a single story. The final chapter will be the conclusion which will offer possible recommendations and final arguments.
CHAPTER TWO:
2.0. THE BEST POLICEMAN: THE DISCLOSURE PRINCIPLE AND VIRTUE ETHICS THEORY
2.1. INTRODUCTION
This chapter describes various theories that form the thematic basis of this dissertation. The theories of Corporate Governance include the agency theory[36], stewardship theory[37], stakeholder theory[38], resource dependency theory[39], political theory[40], legitimacy theory[41], social contract theory[42] and the group of ethics theories.[43] The main theories pertinent to this discussion are first, the disclosure principle[44] which will encompass governance theories such as accountability and transparency and second, the virtue ethics theory[45] which contends that decisions can be made for the right reason in a positive state of mind.
It will be apparent from the forthcoming literary work that the theories, as much as they are distinct, will cross cut one another. However, in this dissertation, the disclosure principle and the virtue ethics theory will provide the appropriate frameworks of analysis. For this reason, these two theories have been emphasized and discussed at length in this chapter. Where appropriate, reference will also be made to concepts across the board so as to better explain the argument made. To facilitate this, the other theories, which could be broadly applicable, have also been given a very brief mention. The major characteristics and differences of each will be highlighted distinctively below.
2.2. The Disclosure Principle
The Organization for Economic Corporation and Development (OECD) defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.[46] It is necessary for the law to control corporate governance and one of the most effective ways of doing so is by employing the disclosure principle.
The major theme of this research paper is based on the principle of disclosure. The best description of disclosure was made by Louis Brandeis, United States Supreme Court Justice in the early 20th Century. He is famous for saying that sunlight is the best of disinfectants and electric light the most efficient policeman.[47] This statement was made in the context of the Great Depression of the 1920s. Brandeis made the statement above in 1933 and even then, financial transparency was the remedy of choice for the fraud and market manipulation that shook the financial markets of the US and contributed to the global financial crisis of the 1920s.[48]
Brandeis argued that the small investor relies almost exclusively on banker’s knowledge and judgment of the quality of the security and it is this which makes his relation to the banker one of confidence.[49] Therefore, the banker must be willing to relinquish what is considered as confidential information to secure an investment. For example, the requirement of a full disclosure on the amount of commission and profits paid to a banker will not only put the investor on their guard but banker’s compensation will tend to adjust itself automatically to what is fair and reasonable.[50]
According to Brandeis, power breeds wealth and wealth breeds power.[51] He states that disclosure must be real and it must be to the investor.[52] It will not suffice to require merely the filing of a state of facts with the Central Bank of Kenya or with a score of other officials of government.[53] Nor would the filing of a full statement with a self-regulatory organization such as the Kenya Bankers Association be adequate.[54]
It can be concluded that transparency and disclosure are essential elements of a robust corporate governance framework. This is because they provide the base for informed decision making by shareholders, stakeholders and potential investors.[55] As Fung points out, there are three basic principles of corporate governance and they include;[56] transparency, accountability, and corporate control.
There is internal transparency and external transparency. Internal transparency puts the right information together with the right person at the right time. External transparency demonstrates communication of values to the company’s customers and consumers.[57] Fung then outlines the five pillars of transparency and disclosure and states that disclosure of reliable, timely information contributes to liquid and efficient markets by enabling investors to make investment decisions based on all of the available information that would be material to their decisions.[58]
Transparency happens only when an institution creates a culture of candor and respect, and stakeholders feel free to speak the truth to the board and management.[59] Bennis and O’Toole offer seven steps for developing a culture of transparency in the organization: [60]Tell the truth; encourage people to speak truth to those in authority; reward contrarians; practice having unpleasant conversations; diversify information sources; admit mistakes; and build organizational support for transparency.
Transparency and disclosure are integral to corporate governance as they reduce the information asymmetry between a company’s management and financial stakeholders, mitigating the agency problem in corporate governance.[61] Iris Chiu is of the view that mandatory corporate disclosure is arguably a constitutive institution of the corporate economy, and its objectives are fraud prevention and investor protection as well as the enhancement of market efficiency and confidence.[62] Quoting Professor Paul G. Mahoney, Chiu opines that mandatory disclosure is used as the means to remedy the agency problem between management and shareholders, thereby reducing agency costs.[63]
Thus the archaic doctrine of caveat emptor is varnishing as the law has begun to require publicity in aid of fair dealing.[64] Corporations such as banks must provide adequate, accurate, and timely information to shareholders and the public regarding financial performance, liabilities, ownership, and corporate governance issues. This is critical if investors are to be able to make informed judgments on the risks and rewards of any investment.[65]
Corporate disclosure is thus grounded in public interest, as an exchange for the public assumption of risk which affords privileges to individuals who wish to conduct enterprise through a corporate vehicle.[66] Disclosure is a strong and recurring theme, it being a nearly century old doctrine, because it is an effective tool for improving investor protection and encouraging better management.[67]
The uniformity of disclosure is maintained by its principles which may vary from one jurisdiction to another. In Kenya, disclosure obtains its legal intervention from the Central Bank Prudential Guideline on Corporate Governance of January 2013. These rules under the guideline are aligned with international best practices of corporate governance.[68] They are intended to provide the minimum standards required from shareholders, directors, CEOs, management and employees of an institution so as to promote proper standards of conduct and sound banking practices, as well as ensure they exercise their duties and responsibilities with clarity, assurance and effectiveness.[69]
Despite the level of importance highlighted, diminutive attention has been given to the issue of the corporate governance, especially with regards to banking.[70] As Shleifer and Vishny point out in their survey, there has been very little research done on corporate governance outside the United States, apart from a few developed countries, such as Japan and Germany. As has been observed, very little attention has been paid to the corporate governance of banks.[71]
2.3. Virtue Ethics Theory
Merrit B. Fox defines corporate governance as the myriad of mechanisms that shape the structure of incentives, disincentives, and prohibitions under which an issuer’s management makes decisions.[72] What this means is that managers and directors wield a colossal amount of power that can easily be misused. To maintain sound corporate practices, there is a code of conduct which rewards those who have followed the rules and sanctions those who have not.
La Porta et al. view corporate governance as a set of mechanisms through which outside investors shield themselves against expropriation by insiders.[73] In its absence, insiders may steal the profits, transfer all assets to another firm they control at below market price, overpay managers or put unqualified persons in management positions through nepotism.[74]
Joh presents evidence on corporate governance and firm profitability from Korea before the Asian economic crisis[75], which was caused by the credit bubble of 1997, and finds that the weak corporate governance system offered few obstacles against controlling shareholders expropriation of minority shareholders.[76] In fact weak corporate governance systems allowed poorly managed firms to stay in business and resulted in inefficiency in resource allocation, despite low profitability over the years.[77]
Brandeis argued that the small investor relies almost exclusively on banker’s knowledge and judgment of the quality of the security and it is this which makes his relation to the banker one of confidence.[78] Therefore, the virtue ethics theory focuses on the moral excellence, goodness, chastity, and good character.[79] Virtue is a state to act in a given situation.[80] It is not a mindless action like a habit.[81] Aristotle calls it a disposition with choice or decision.[82] Virtue involves two aspects, the affective and intellectual. The affective concept suggests having positive feelings while doing the right thing.[83] The intellectual concept suggests doing a virtuous act for the right reasons.[84] Education can be used to instill virtues hence if a person is exposed to good or positive ethical standards, then he would exercise the same.[85]
2.4. Other Applicable Theories
The Agency Theory is described as the relationship between principals and agents. Principals are the owners of the banks and they hire agents such as managers, CEOs, directors and top executives to act as their agents.[86] Knowing these roles is essential to corporate governance. Within this theory there exists a concept referred to as the separation of ownership and control. The separation of ownership and control is described as secession of management from finance and is in the essence of the cause of the agency problem.[87] The agency problem refers to the difficulties investors face in ensuring their funds are not wasted or expropriated by those charged with its custody.[88] Mallin argues that scholars such as Berle and Means viewed corporate governance as a tool to reduce the principle-agent problems.[89]
The stakeholder theory contends that any group or individual who can affect or is affected by the achievement of the organization’s objectives.[90] It is more of a broad research tradition, incorporating philosophy, ethics, political theory, economics, law and organizational science.[91] Wheeler et al. argued that the stakeholder theory is derived from a combination of sociological and organizational disciplines.[92]
The stewardship theory presents a model of management where managers are considered good stewards who will act in the best interest of the owners.[93] The fundamentals of the theory focus on the behaviors of managers therefore based on social psychology.[94] It suggests that management and the board of banks for example are motivated by a larger force than that of personal wealth.[95] Davis, Schoorman & Donaldson contend that a steward’s behavior is pro-organizational and collectivists which will never depart from the interest of the organization because the steward seeks to align his interests with those of the organization.[96]
The Resource Dependency Theory focuses on the role of the board of directors in providing resource needed in the firm.[97] The basic proposition of it is the need for external relationships between a bank and outside resources with the directors’ purpose being to facilitate the connection to these outside resources.[98] Hillman, Canella and Paetzold propound that the theory focuses on the role that directors play in securing essential resources to an organization through their connections to the external environment.[99]
The Social Contract theory sees society as a series of social contracts between members of society and society itself.[100] Donaldson postulates the existence of a school of thought which sees social responsibility as a contractual obligation the firm or bank owes the society.[101] Donaldson and Dunfee further developed a cohesive social contract theory as a way for managers to make ethical decisions which is referenced by macrosocial and microsocial contracts.[102] Macrosocial contracts refer to the expectations from the business to deliver support to the local community and microsocial refers to specific forms of involvement.[103]
Another theory is the legitimacy theory which Suchman defines as a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate with some socially constructed systems of norms, values, beliefs and definitions.[104] It is based on a notion that there is a social contract between society and an organization.[105] Deegan argues that because society provides corporations the authority to own and use natural resources and to hire employees, a firm receives permission to operate from the society and is ultimately accountable to the society for how it operates and what it does.[106] The banks then must consider the rights of the public at large not merely investors. If there is a failure to comply with societal expectations, sanctions and restrictions may be imposed on the firm.[107]
The political theory uses the approach of developing voting support from shareholders, rather by purchasing voting power.[108] Hawley and Williams say that governance structures are influenced by politics.[109] Hence having a political influence in corporate governance may direct corporate governance within the organization.[110] Pound contends that public interest is much reserved as the government participates in corporate decision making, taking into consideration cultural challenges.[111] The political model highlights the allocation of corporate power, profits and privileges are determined via the governments’ favor. [112]The political model of corporate governance can have an immense influence on governance developments.[113]
The transaction cost theory was first initiated by Cyert and March and later theoretically described by Williamson. It is an interdisciplinary alliance of law, economics and organizations.[114] The firm is viewed as organization comprising of people with different views. [115]The organization structure of an organization can determine price and production stemming from the underlying assumption that firms have become so large and as an effect, substitute or the market in determining price and production.[116] The unit of analysis in this theory is a transaction. Williamson suggests that managers are opportunists and align the bank’s transactions to their interests.[117]
The business ethics theory discusses the power and influence of businesses in any given society is stronger than ever before which means that a collapse has a greater impact on society for the demands placed by a business’s stakeholders are more complex and challenging.[118] The education on business ethics has not been popular in the past but its importance continues to be recognized.[119] For instance it is essential because it assists us identify benefits and problems with ethical issues within the firm.[120]
The feminist ethics theory emphasizes on empathy, healthy social relationships, loving care for each other and not always focusing on a profit making motive at all times.[121] The ethics must also be examined in context that is, observed within the environment within which it operates.[122] Casey contends that this is important as an organization is a network of actions which influence trans-communal levels and interactions. [123]
This theory goes beyond the facial value of morality and addresses the inner feelings of a situation.[124] It provides a more holistic approach in which firms or banks may make goals by prioritizing which comes before the other, foregoing the minimal focus on values which may result in a long-term detrimental effect.[125] The final theory, discourse ethics theory is concerned with peaceful settlement of conflict.[126]
2.5.CONCLUSION
This section of the dissertation describes various theories of corporate governance that have been part of scholarly discourse since the times of Adam Smith. The disclosure principle discusses the need for transparency and accountability in governance while virtue ethics contends that proper corporate management decisions are influenced by the virtues of the decision makers. Transparency and morality in bank management are essential to the main argument of this dissertation which is, to guarantee bank stability there needs to be improved governance by senior bank executives.
The chapter has gone over and above the definition of corporate governance which is a contribution to the better understanding of the rationale behind the concept. One main objective of the chapter was to show that the disclosure principle is capable of serving as a theory of corporate governance. It is able to fill the gaps left by other theories. For instance the stakeholder theory is challenged in that it fails to draw the importance of flow of information within the corporate entity. Disclosure embraces both internal and external transparency. It not only links transparency to accountability but it embodies the spirit of all the other theories creating a more comprehensive theoretic framework which is not easily refuted as the rest are.
The other objective was to highlight the relevance of the virtue ethics theory for effective corporate governance. The claim made is that virtues allow senior management of banks to enjoy making decisions because they are driven by an ethical or moral standpoint. The theory encourages them to do the right thing which is to look out for the interests of their depositors. Despite its unpopularity, it is an essential tool, much more so than positivist rules based on other theories because it goes beyond the surface requirements of GCG and delves into the mindset and feelings of the directors. IBL’s manager, Abdulmalek Janmohamed, would undoubtedly not have gone to great lengths to expropriate funds from his depositors had he been driven by moral antiquities.
As was made evident, there are various theories of corporate governance. The decision to make the disclosure principle and the virtue ethics theory the center of this chapter was based on the fact that they are more suited to form the thematic basis the problem of corporate governance disclosure. Both theories analyze the human aspect of governance which is so often forgotten and to some extent ridiculed.
CHAPTER THREE
THE LEGAL AND INSTITUTINAL FRAMEWORK OF KENYA’S BANKING SECTOR
3.1. INTRODUCTION
Banks and financial markets have very complex structures but they serve very simple purposes. These include taking in the assets of persons in the society, pooling these assets to advance credit and in the process providing a significant part of the means of payment for goods and services.[127]
Corporate Governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship between corporate managers and corporate insiders on the one hand, and investors on the other.[128] Consequently, a financial system can only be as efficient as the laws that govern it and the institutions that oversee its operations.
This chapter critically interrogates the legislative framework in Kenya’s banking sector which constitutes the Central Bank of Kenya Act, the Banking Act and the Central Bank of Kenya Prudential Guidelines of January 2013. It will begin by examining the different models incorporated in various economies then move on to highlight the relevant provisions in the three instruments above mentioned particularly those sections encompassing the subject matters of corporate governance disclosure. It will conclude by outlining the limitations of the current legal framework and in so doing reiterate the premise, good laws means good banks.
3.2. TYPES OF FINANCIAL REGULATION
Regulation of financial services has three facets;[129] government regulation, self-regulation, and self-regulation with oversight. There are different types of regulatory models as well and their application differs from one jurisdiction to another. They include; regulation by objectives, functional regulation, institutional regulation, and single regulator model.[130] Currently Kenya’s financial sector is governed by a multitude of self-regulatory institutions and government oversight.
Kenya’s financial system is made up of the banking, capital markets, and insurance sectors. The current regulatory model for financial regulation in Kenya is a mélange of institutional and functional regulation.[131] There are seven Governmental agencies charged with specific responsibilities with regard to regulation for instance, The Central Bank of Kenya (CBK) licenses and supervises the operations of all commercial banks excluding the Kenya Post Office Savings Bank (KPOSB) which is regulated by the Treasury. [132]
Structure of Kenya’s Institutional Regulatory Framework[133]
Central bank of Kenya
Kenya Bankers Association
Retirement Benefits Authority
Ministry of Finance Treasury
Industrial development Bank
Kenya Post Office Savings
Monopolies and Price Departments
Insurance Regulatory
Authority
Capital Markets Authority
Given the ongoing question about the effectiveness and efficiency of financial regulation, and its use as a potential instrument for reform, governments have continued to assess, and reassess the policy and regulatory framework for the financial system with a view to ensuring public confidence in the system and its safety and soundness, but also retaining its flexibility and innovative character.[134]
3.3. LEGISLATIVE FRAMEWORK
3.3.1. CENTRAL BANK OF KENYA ACT
The Central Bank of Kenya Act (CBK Act) is an Act of Parliament to establish the Central Bank of Kenya (CBK) and to provide for its operation, to establish the currency of Kenya and for matters connected therewith and related thereto.[135] The CBK is the principal regulator of the banking industry.
The CBK’s functions[136] are outlined by the CBK Act to include formulating and implementing monetary policy, fostering liquidity, solvency and proper functioning of a stable market-based financial system and supporting the economic policy of Government.[137] These functions form the principal objects of the CBK. Its other duties include;- to formulate and implement foreign exchange policy, hold and manage foreign exchange reserves;- licence and supervise authorized dealers, formulate and implement the best policies that will facilitate the establishment;- regulation and supervision of efficient and effective payment, settlement and clearing systems;- act as banker, adviser to and fiscal agent of the Government;- and issue currency notes and coins.[138]
For each financial year, the Minister of Treasury (hereafter “the Minister”) is mandated to specify the price stability target in consultation with CBK and publish notice thereof which is also to be presented to the Finance Committee in the National Assembly.[139] The Minister is also required to furnish the Committee with Monetary policy statements developed by CBK which the Bank must also gazette and provide information on, to the public.[140] If in the Minister’s judgment, the monetary policy developed by CBK is not in tandem with its objects, he may give a directive for it to be adjusted accordingly with such directive being published in the gazette.[141]
There is a Board of Directors charged with the management of CBK[142] and each member has the duty to disclose a conflict of interest on a subject matter being determined by the Board.[143] The CBK shall publish in the Gazette, its website and two daily newspapers of national circulation, information on the average lending and deposit rates for all banks and financial institutions, the interest rate spread and its composition, and a simplified version of the balance sheets and income statements.[144]
Furthermore, commercial banks must disclose any positive or negative information of its customers to the licensed credit reference bureaus, where such information is reasonably required for the discharge of the functions of the banks and the licensed credit reference bureaus. [145] Banks, subject to written consent from relevant persons, shall furnish to the CBK, upon request, any information and data required for the proper discharge of its functions as regulator.[146] This information or data may be published if the circumstances warrant it.[147]
CBK is also required, for each financial year, to submit to the Minister a report on its operations together with a balance sheet and profit and loss account.[148] This annual report shall be published with the option of including any information CBK sees fit in the name of public interest.[149]
3.3.2. BANKING ACT OF KENYA 2015
This is an Act of Parliament to regulate the business of banking and matters incidental thereto.[150] Banking business is defined as the accepting from members of the public of money on deposit or current account repayable on demand or at the expiry of a fixed period or after notice, payment on and acceptance of cheques, and the employing of money held on deposit or on current account by lending, investment or in any other manner for the account and at the risk of the person so employing the money.[151]For a business to operate as a bank, it must be licenced under the Banking Act and given requisite authorization by the regulator.[152] Failure to do so is an offence whose penalty includes a fine of not more than five hundred thousand shillings, imprisonment for two years or both.[153]
The process of licensing institutions encompasses the certification by the CBK of the professional and moral suitability of persons chosen to manage the bank.[154]From time to time, an assessment of the professional and moral suitability of persons chosen to manage and control an institution may be done.[155] The CBK, under direction by the Minister, may cause an inspection to be made by any person authorized by it, in writing, of any institution and their books.[156] When an inspection is made, the institution and every officer and employee shall produce and make available all the books, accounts, records, and other documents relating to its business and conduct.[157] CBK has the authority to put in place restrictions and sanctions where an inspection report reveals that an institution conducts its business in a manner contrary to the Act or regulations made thereunder.[158]
A bank before opening a new branch must obtain the go ahead from CBK which requires disclosure of the history and financial condition of the institution, character of its management, professional and moral suitability of its management, adequacy of its capital structure and earning prospects and any other pertinent information.[159]
3.3.3. CENTRAL BANK OF KENYA PRUDENTIAL GUIDELINES FOR INSTITUTIONS LICENCED UNDER THE BANKING ACT OF JANUARY 2013
The CBK Act provides that the Bank may make regulations for the purpose of giving effect to its provisions and generally for the better carrying out of the objects of the Bank.[160] These regulations may prescribe penalties for offences.[161] With that spirit, the Central Bank of Kenya Prudential Guidelines of January 2013 were formulated (Guidelines).
According to the guidelines established by the Central Bank of Kenya, Corporate Governance involves the manner in which the business and affairs of an institution are governed by its board and senior management and provides the structure through which the objectives of the company are set, the means of attaining those objectives and manner of monitoring performance.[162]
The uniformity of disclosure is maintained by its principles which may vary from one jurisdiction to another. In Kenya, disclosure obtains its legal intervention from the Central Bank Prudential Guideline on Corporate Governance, January 2013. These rules under the guideline are aligned with international best practices of corporate governance.[163] They are intended to provide the minimum standards required from shareholders, directors, CEOs, management and employees of an institution so as to promote proper standards of conduct and sound banking practices, as well as ensure they exercise their duties and responsibilities with clarity, assurance and effectiveness.[164]
The twelfth principle in the prudential guidelines outlines the disclosure requirements to include timely and accurate disclosure of material information which communicates the bank’s objectives, governance structures, risk appetite among other related factors.[165] The requirements take cognizance of proportionality, materiality of information, risk strategies and structures as well as accuracy and timeliness.[166]
3.4. LIMITATIONS OF THE LEGAL FRAMEWORK
Kenya’s legal framework appears comprehensive but banking practice is at its worst. It means there are limitations that are challenging the regulations’ efficiency and effectiveness. For example, if you critically analyze the guideline you will realize it does not restrict or replace the proper judgment of the management and employees in conducting day to day business.[167] Each institution is required to formulate its own policy which takes away the mandatory aspect of regulatory framework as is expected of all statutory instruments. As much as these guidelines offer direction as to what is expected from banks, they form a policy framework and not a mandatory legal framework. Their application is discretional and banks have the liberty to choose how they disclose their affairs. This creates ambiguity which negates the whole purpose of regulation.
The objectives of regulation are primarily intended to protect the investor to help build confidence in the market; reduce systemic risk; ensure markets are fair, efficient and transparent; and to protect financial service businesses from malpractice by some consumers.[168]These rules are applied for the sake of protecting investment because the financial service sector controls a large amount of money therefore there is a need to protect consumers and the economy as a whole.
The structure and operation of the financial system has undergone obvious changes beyond its traditional functions.[169] This can be attributed to the improvements in technology, rapid product innovation, and ongoing global financial system integration, competition in financial services, and policy, regulatory and trade reforms.[170] Consequently, the need for sound regulation of the financial system is critical, now more than before. This is because, despite the positive impact these developments have had, problems of confidence and trust have tormented the financial system.[171] It begs the question, “what then is the legal problem?”
3.5. CONCLUSION
Chapter three began with a discussion of the types of regulatory frameworks for the financial sector which is made up of the insurance, capital markets and banking industries. As was contended, the type of regulatory model employed in Kenya’s financial sector is a mélange of self-regulatory institutions and government oversight. For instance in banking regulatory institutions include the Central Bank of Kenya which is a government body and the Kenya Bankers Association which is an umbrella body spear headed by private sector.
The chapter also highlighted the various statutory instruments that regulate banking which include the CBK Act, the Banking Act and the CBK Prudential Guidelines of January 2013. Within these statutes are provision that articulate corporate governance disclosure. For instance, the Banking Act makes provision for the disclosure of the character of the management and their moral suitability.[172]
The final analysis of the chapter focuses on the limitations of these legal instruments and the legal framework as a whole. Disclosure as articulated in the law is based on discretion which leaves room for misuse by bank executives and an ultimate breakdown of governance in banking institutions.
4.0. CHAPTER FOUR
4.1.BANKING SCANDALS: CONTEXTUAL AND COMPARATIVE ANALYSIS
4.1.1. INTRODUCTION
Banks serve society in various roles the main one being to mobilize savings which act as a source of funds. Corporate governance disclosure assists depositors exercise their rights more effectively which in turn safeguards their savings.[173] This section focuses on case studies that are pertinent to the issue of corporate governance disclosure and its challenges in Kenya’s banking sector. It will begin by analyzing banking scandals that have occurred between the years 2015 and 2016 in the Kenyan jurisdiction highlighting their causes and effects. It will then move on to the United States jurisdiction offering a comparative analysis between a developing and developed financial sector.
The main objective of this chapter is to contribute to the discourse on weak corporate governance structures within Kenya’s financial sector thereby making contributions as to how to tackle the problem. The section will also outline the anatomy of the various scandals which educates society reducing asymmetry of information. Caprio and Levine point out a feature of financial intermediaries that affects corporate governance. Banks are more opaque, which intensifies the asymmetry of information that causes the agency problem.[174] In that regard, the discussion that ensues will exhibit that this feature of financial intermediaries exacerbates the state of poor corporate governance.
4.2.1. Kenya
Chapter one mentioned that the banking sector in Kenya was under siege in the period 2015 to 2016. Events which preceded this literature saw two well-known mid-tier lenders, Imperial Bank Limited (IBL) and Chase Bank Kenya Limited (Chase Bank) being placed under receivership[175], National Bank of Kenya (NBK), whose major shareholder is the Government of Kenya, suspended its top executives and towards the end of 2016 appointed new ones.[176] The fourth, Dubai Bank Kenya Limited (Dubai Bank) had an order of liquidation delivered against it by the High Court of Kenya.[177] Directors of the said banks were accused of conducting, albeit clandestinely, unethical and to some extent, unlawful transactions to enrich themselves at the expense of their unknowing depositors. The discussion that follows will analyze these scandals and expound on their causes and effects.
I. Dubai Bank Scandal
The Kenya Deposit Insurance Corporation (KDIC) was appointed receiver manager of Dubai Bank on August 14th 2015.[178] Among other things, the Bank could no longer meet its financial obligations and it had violated banking laws and regulations which included not maintaining adequate capital and liquidity ratios as well as the existence of weak corporate governance structures.[179] The regulator also cited serious cases of parallel banking, a large amount of unsecured loans that were not being serviced, interference with client accounts and a lack of a full organizational chart as provided for by the law.[180]
These discrepancies exposed the Bank to potential losses of more than one billion Kenya shillings.[181] CBK assessed the situation and concluded that liquidation was the only suitable resolve. This influenced its decision to appoint KDIC to manage the bank.[182] This resulted in depositors’ money being held for at least a year with a warning from KDIC stating that only insured deposits worth one hundred thousand Kenya shillings (Kshs. 100,000/=) would be paid.[183] Despite the lack of access to funds, debtors who were also Dubai bnak’s depositors were still expected to service their loans which were to be collected by the KDIC.[184]
The bank then faced possible liquidation. Richardson and David Limited, the bank’s second largest depositors, moved to the Court of Appeal seeking an injunction to block the liquidation.[185] They were afraid that the sole intention of KDIC was to strip the bank of all its assets to the detriment of creditors and depositors.[186] The Court stopped the liquidation for sixty days in a ruling that accused the CBK of being premature and negligent.[187] KDIC was then directed to consider revival bids from interested parties within this time. The Chairman of Dubai Bank, Mr. Hassan Zubeidi was on the frontlines of opposition to liquidation arguing that the accusations against him were false and malicious.[188] Unfortunately for him, the High Court on the 10th of July 2016, refused to extend an order against the winding up of Dubai Bank giving KDIC the greenlight to liquidate it.[189]
II. Imperial Bank Scandal
In October 2015, CBK put another Kenyan Bank, Imperial Bank Limited (IBL), under statutory management barely months after taking the same measures against Dubai Bank.[190] The regulator had discovered that unsafe and unsound business conditions were in play and it was the bank’s board which had brought this matter to CBK’s attention.[191] On October 13th 2015, 52,398 depositors of Imperial Bank were left paupers.[192] They were not allowed access to their accounts as the bank had been placed under KDIC’s management.[193]Imperial Bank, at the time of its demise, was the second bank to close down since the coming into office of Governor Patrick Njoroge. The first was Dubai Bank.
The Managing Director, Abdulmalek Janmohamed, is said to have orchestrated a bigger scandal than Goldenberg.[194] He ran an elaborate scheme that robbed the lender of thirty four billion Kenya Shillings which forced the regulator to shut it down.[195] Court documents show that by manipulating the software systems of the bank, he was able to siphon billions.[196] Through a network of twenty (20) companies and individuals, Mr. Janmohamed executed and covered up a major fraud that shook Kenya’s financial services sector.[197] These transactions were kept off the books with the knowledge of only a few of his senior directors.[198]
Imperial bank directors sued these twenty companies and individuals in an attempt to recover the colossal amount.[199] The directors who filed the suit under a certificate of urgency argued that an expedient determination was necessary because the bank’s future, whether to re-open or liquidate, would depend on the ability to trace and recover the amounts that had been fraudulently appropriated by the Mr. Janmohamed and his patrons.[200] High Court judge, Fred Ochieng granted an order freezing all accounts of the twenty individuals and companies until the defendants had made their case as to why the caveat should not stand until the suit was determined by the Court.[201]
In the suit, which was filed on 27th October 2015, the framework of Mr. Janmohammed’s scheme was revealed which he had kept secret by falsifying the bank’s books of accounts.[202] For instance, Mr. Janmohamed and his associates used twelve (12) companies to open accounts at the bank in which they deposited large amounts of cash that was then moved out and the accounts immediately closed.[203] Naeem Ahmed Shah, who was head of credit at Imperial Bank, and James Kaburu, who was head of finance were among those who were charged with defrauding the bank of twenty nine billion Kenya Shillings through a falsified overdraft disbursement scheme.[204] They were the top managers who transferred money out of the accounts.[205] They went as far as manipulating software systems to ensure the fake accounts disappeared and could not be traced.[206] Furthermore, all communication between bank officials on the illegal transfers was done through hand written notes which were destroyed.[207]
The court documents also revealed that Mr. Janmohamed on passing away in September 2015 had left a vast estate, a large amount constituting real estate, a five percent stake in Butali Sugar Mills Limited, a five percent stake in IBL and a stake in Old Mutual Group Limited among others.[208] The list of companies that acted as shell corporations used to embezzle depositors’ savings include W.E. Tilley (Muthaiga) Limited, Primecatch Export Limited, Mara Fish Packers Limited, J Fish Limited, Victorian Delight Limited, Ruby Red Limited, Vale Pak Foods Limited, From Eden Limited, Marmo E Granito (T) Limited, Marbo Marble Limited and Fishways Limited. The family of the deceased businessman, Nargis Aziz Ali Jessa was also enjoined in the suit because of their significant interests in the firms mentioned.[209] By the time of writing this dissertation, the court battles were still in progress as depositors waited to access their funds.
III. National Bank Scandal
On March 29th 2016, the managing director of National Bank of Kenya Limited, Mr. Munir Sheikh Ahmed, and five top managers were sent on compulsory leave pending investigations into alleged breach of fiduciary duty and failure to adhere to corporate governance rules.[210] The bank did not name the five executives.[211] In a press statement it made on the 29th of March 2016 through its chairman Mohammed Hassan, it stated that it had instituted an internal review of its financial performance, a process they wished to maintain as independent hence the request by the board for its executives to go on leave.[212] This announcement was made following a series of multi-pronged audits ordered by the CBK and the Capital Markets Authority (CMA) which revealed massive gaps in the bank’s books.[213]
The bank, which has a significant shareholding owned by taxpayers through the Treasury, re-appointed Deloitte Touche Tohmatsu Limited(Deloitte) as its auditors during the last annual general meeting held in March 2015. The six suspended executives were expected to present themselves for questioning during the forensic audit.[214]
The bank, over the Easter weekend of March 25th to 28th 2016, had sent out two panic statements stating that the then ongoing scrutiny of its accounts was in line with CBK operational guidelines.[215] Mohamed Hassan praised the board’s actions as evidence of the bank’s unequivocal demonstration of its commitment to corporate governance and CBK guidelines.[216]
Seeking to dispel rumors of its financials, the bank made a statement on March 25th 2016 explaining that a series of multi-pronged audits by various bodies, were a usual occurrence conducted every quarter, in line with the regulator’s operational guidelines.[217] The lender put out another statement on March 28th 2016 requesting members of the public and the media to disregard false stories spread by ill-intentioned persons on social media about the bank, its chairman and managing director.[218]
Mr. Ahmed became Kenya’s first banking chief executive to be sent on compulsory leave in more than a decade.[219] Insiders said the drastic action to suspend Mr. Ahmed traileds a firm attitude the CBK governor has taken over regulatory matters.[220] The bank, however, said it did not expect the executive changes to affect normal operations.[221]
This is one more out of many other occasions that National Bank had been caught in regulatory cross-hairs.[222] The bank in April 2015 suspended its finance director, Chris Kisire, after he was linked to the mismanagement at Mumias Sugar Company Limited.[223] Mr Kisire was one of the people named in President Uhuru Kenyatta’s list of corrupt public servants tabled in Parliament in March 2015.[224] National Bank was also listed as one of the alleged conduits through which former Imperial Bank managing director Abdulmalek Janmohamed siphoned cash from the bank.[225]
A parliamentary watchdog committee report in 2015 also uncovered a scheme where senior officials from the Ministry of Internal Security allegedly used a secret bank account at National Bank to siphon billions of shillings in taxpayers’ money in the run-up to the 2013 General Election.[226] The Public Accounts Committee accused the ministry of running a clandestine account at National Bank where two billion and eight hundred thousand shillings was wired and spent on items marked as ‘confidential.’[227] To make matters worse, National Bank went on to further put itself in a capricious situation when it declined to reveal the names of the signatories to the account citing customer confidentiality rules.[228]
IV. Chase Bank Scandal
On the 5th of April 2016, Chase Bank Limited’s chairman, Mr. Zafrullah Khan and group managing director, Mr. Duncan Kabui stepped aside following concerns over the credibility of the bank’s financial statements.[229] The bank sent shockwaves in the market with a restatement of its financials showing it had under-reported insider loans by a whopping eight billion Kenya Shillings.[230] This was such an unusual situation to the extent that Deloitte Touche Tohmatsu Limited (Deloitte), Chase Bank’s auditor, offered a ‘qualified’ audit opinion of the lender’s finances, which had not happened in nearly twenty years.[231] A qualified audit opinion means that the information received by the auditor on the company’s financial performance was limited in scope or the company’s accounting methods did not meet the requisite accounting standards.[232]
Following inaccurate media reports and the stepping down of two of its directors, on April 6th 2016, CBK placed Chase Bank Limited under statutory management for a year due to its unsafe financial conditions.[233] The regulator stated that the drastic decision was necessary as the bank had experienced liquidity difficulties and was unable to meet its financial obligations.[234] CBK appointed the KDIC as its receiver manager for the 12 months of which Chase Bank would be under receivership.[235] KDIC assumed management, control, and conduct of the affairs of business of the institution to the exclusion of its board of directors and was to also advise CBK appropriately of a suitable resolution or strategy.[236]
Furthermore, the Central Bank of Kenya seized eight billion Kenya Shillings and prime properties of land from Chase Bank directors.[237] They had awarded themselves large interest-free loans and irregularly acquired the confiscated properties under the guise of sharia-compliant lending.[238] CBK Governor said a preliminary audit by CBK showed that the directors had awarded themselves 15 year interest-free loans under the guise of Islamic banking.[239] The Governor was unwavering in his opinion that the board members must be held accountable for the sake of public interest.[240] The prime assets forcefully seized include a business park in Karen, a three-acre parking lot in Nairobi, some 240 acres of land on Mombasa Road, a three-acre plot next to the German Embassy on Riverside Drive, Nairobi and various high-end properties in Dubai.[241]
KDIC delegated its responsibilities to Kenya Commercial Bank (KCB) who acted as receiver manager of the troubled bank. In May 2016, KCB, working with the KDIC reopened Chase bank’s 57 branches.[242] The KCB Group CEO and Managing Director explained that he expected Chase Bank to come out of receivership as they had received tremendous support from customers, depositors and other stakeholders.[243]
V. conclusion
To summarize, Dubai Bank had violated the relevant laws and regulations governing banking and was characterized by weak corporate governance structures. This contributed to its inability to meet its financial obligations. IBL too was characterized by weak corporate governance with its former Managing director having orchestrated the misappropriation of billions of shillings in depositor’s funds. Similarly, National Bank exhibited weak corporate governance which caused it to suffer tremendous losses and to rectify the situation it suspended some of its top executives. Finally, Chase Bank directors were forced out of office following an allegedly deliberate ploy on their part to hide losses by concealing real values in the books of account. They had also taken part in the misdirecting of funds to enrich themselves. It is evident that the banking sector was following a trend of bad corporate governance practice.
4.2.2. The United States of America
Morality has been set aside to maximize profits and the consequences that have followed are a clear indication that there is a serious ethical issue. As discussed in chapter two, there is a fine line between corporate governance and corporate ethics driven by what virtues human beings possess. There cannot be one without the other and trying to explain this to the corporate world is not an easy feat.
Corporate America has gone through the Great Depression in 1929, the 1973 Oil Embargo, the recession in the early 80s, Black Monday in 1987, the 2001 Dot-Com Crush, and the Housing market collapse which led to the 2008 recession.[244] To discuss all these scandals will not be plausible in this context as they require going into great detail. To avoid scattering the subject matter in discussion, the focus will be on the most recent US financial scandal preceding this dissertation which is the Wells Fargo Scandal.
II. The Wells Fargo Scandal
Jon Stumpf, the chief executive of Wells Fargo Bank Limited, one of the largest banks in the United States, condemned the practice of offering customers financial products that they do not fully comprehend especially where the propensity to incur a liability is quite high.[245] There was clearly a disconnect between what Stumpf was telling the public and what exactly was happening at Wells Fargo.[246] Andrew Ross Sorkin wrote in the New York Times[247] that Wells Fargo had always been far removed from the excesses of Wall Street.[248] It had made an effort to separate itself from financial capital of the world with the geographical location of its headquarters[249] being situated in California. Furthermore, it had long been held to be a bank of trust and ethics.[250]
This positive image that had been cultivated by the bank is no more. In 2016, it had to fire 53,000 of its employees for signing up customers for checking accounts and credit cards, without their consent or knowledge.[251] According to the authorities, two million sham accounts were opened in processes that involved forging of signatures, opening fake emails and generating fake PIN numbers.[252] It is contended that employees were hounded by executives to meet certain profit margins which drove them to ridiculous and outrageous actions as the ones outlined above.[253] They also rewarded them for opening as many accounts as possible.[254] What was more unsettling was that the bank charged real customers for maintenance of their fake accounts generating an income of about one and a half million dollars from the charges.[255] However, this was considered to meager a return to warrant such illicit behavior.[256] Carrie Tolstedt, the company executive who oversaw those employees, was not arrested although she had retired months before the scandal was made public.[257] She was actually rewarded handsomely with a package worth approximately one hundred and twenty four million dollars.[258]
Wells Fargo was ordered to pay a fine of one hundred and eighty five million dollars which compared to the five billion dollars it made in profits during the same year, seemed dismal.[259]It is highly unlikely that anyone will be jailed for this offence despite the fact that many victims took serious hits to their credit scores for not staying current on accounts they did not know they had.[260] This will inevitably limit their access to loans or mortgages affecting their living standards in the long run.[261]
The Bank’s problems originated in its aggressive cross selling approach which encouraged salespeople to sign up its customers for multiple banking products.[262] Employees who missed their quotas would be sanctioned by having to work weekends or stay late.[263] Adam Davidson at the New Yorker[264] opined that if banking regulation were working, Wells Fargo’s executives would have never allowed such risk taking.[265] Stakeholders seemed to not be excited about this scandal because it was regarded as a miniscule deceit in terms of how much money was lost.[266] Although, it could be argued that that the value of personal credit lost is what is of significant value. Wells Fargo was a textbook example of what politicians refer to as a criminal enterprise.[267]
II. Conclusion
Wells Fargo allowed its employees to cheat their customers for the sake of maximizing profit. It is true that ethics has been undermined in the banking sector and profit maximization has been encouraged through whatever means possible disregarding the consequences that may ensue. The likelihood that the directors will be held accountable is slim as is the case in Kenya. Generally, developed and developing nations experienced the same corporate governance issues and both economies are facing serious challenges in trying to streamline their financial sectors and their respective participants.
4.3. CONCLUSION
In this chapter, the four major banking scandals that have occurred in the past two years have been used to illustrate the problems Kenya’s banking sector is facing with regards to corporate governance disclosure. The warrying factor is that in only two years, these many banks were sanctioned as a result of poor management. It definitely communicates that there is a dire problem that needs fixing.
The discussion on the Dubai Bank scandal highlighted how the executives of said bank failed to adhere to certain banking standards that drove it to its demise. The Imperial Bank scandal soon followed and it was a depiction of disaster seeing as it involved one man orchestrating an outright theft from the bank’s depositors. What made this case worse was that the culprit had died before his crimes were exposed therefore, he could not be held accountable. As if this matter could not be more bizarre, the regulatory authorities had no idea, not until the board of directors, without being prompted, took the information to them.
National Bank was the next casualty. Fortunately for this bank, the top executives were relieved of their duties in a secretive dismissal and the bank quickly set up structures to help it get back on level ground. The final case was that of Chase Bank. The bank enjoyed a healthy reputation even days before rumors began of its imminent failure and when the actions of its directors were brought to light, it was hard to believe.
These examples provide evidence that supports the argument that corporate governance is necessary for the creation of incentives that influence proper management of banks. As has been argued, once disclosed, senior executives are forced to toe the line because public image is everything in the banking business. It is also apparent that virtue ethics needs to be pumped into the culture of corporate practices to avoid self-interested decision making that is costing the economy serious investment.
5.0. CHAPTER FIVE
5.1. A SUMMARY OF THE IMPORTANCE OF CORPORATE GOVERNANCE DISCLOSURE IN THE BANKING SECTOR
Banks play a significant role in society. King and Levine argue that banks have an overpoweringly dominant position in a developing economy’s financial system, and are extremely important engines of economic growth.[268] Second, banks are characteristically the most important source of finance in undeveloped financial markets of developing economies such as Kenya’s.[269] Third, banks in developing countries are usually the main depository for the economy's savings.[270] Fourth, many developing economies have liberalized their banking systems through privatization and by reducing the role of economic regulation.[271] Consequently, managers of banks in these economies operate with greater freedom.[272] It can be argued that this creates a propensity for bank management to manipulate regulation to serve personal interests.
Therefore, there is a need for a mechanism which limits the actions of bank directors in exercising their duties. This mechanism known as corporate governance involves the manner in which the business and affairs of an institution are governed by its board and senior management.[273] It provides the structure through which the objectives of the company are set, the means of attaining those objectives and manner of monitoring performance.[274]
Fox defines corporate governance as the numerous mechanisms that shape the structure of incentives, disincentives, and prohibitions under which an issuer’s management makes decisions.[275] What this means is that managers and directors wield a colossal amount of power that can easily be misused. According to Brandeis, power breeds wealth and wealth breeds power.[276] In the context of IBL, its former managing director, now deceased, Mr. Janmohammed wielded a lot of power over his board and subordinates. This gave him absolute control over the bank’s affairs allowing him to steal billions of depositors’ funds.[277]
As clearly seen in earlier chapters corporate governance is a problem area for various banks in Kenya such as Dubai Bank which violated banking laws and regulations on corporate governance structures.[278]This led to its inability to satisfy its financial obligations. Richard Frederick argues that better run companies contribute to greater economic efficiency and a greater capacity to generate wealth.[279] Therefore where corporate governance structures are weak, a bank is most likely to fail. For instance, Dubai Bank was forced into liquidation.[280]
Good corporate governance as this dissertation contends is best guaranteed through disclosure. Transparency and disclosure are integral to corporate governance as they reduce the information asymmetry between a company’s management and financial stakeholders, mitigating the agency problem in corporate governance.[281] Consequently, the unyielding power in the hands of directors is checked. For instance, banking law in Kenya requires an institution and every officer and employee during inspection, to produce and make available all the books, accounts, records, and other documents relating to its business and conduct.[282] Asymmetry of information was well illustrated in the case of Wells Fargo, where employees were fraudulently opening checking accounts and acquiring credit cards in the name of their customers who had no knowledge of such acquisitions.
Fung’s argument for disclosure propounds that it should constitute reliable and timely information to contribute to liquid and efficient markets. The twelfth principle in the prudential guidelines embraces timeliness and accuracy of material information in the disclosure of the bank’s objectives, governance structures, and risk appetite among other related factors.[283] This enables investors to make investment decisions based on all of the available information that would be material to their decisions.[284] The senior management of the National Bank of Kenya failed to disclose its losses comprehensively and in time and unfortunately, investors were negatively affected.[285] Thereafter, their failed attempt of masking audits on their financials as regular procedure was soon discovered to be a quick and easy cover up of mismanagement by some top executives.[286] There is no longer strict adherence to the archaic doctrine of caveat emptor.[287] Where management fails to follow the disclosure guidelines set by law the consequences may involve loss of employment as was the case for NBK’s top executives.
Despite efforts to reduce the problems that arise from bad governance through disclosure, there is always a need to rethink how to apply the law as society is always in flux. Government’s continued assessment of the policy and regulatory framework for the financial system is necessary.[288] It maintains its effectiveness and efficiency and its use as a potential instrument for reform.[289] The assessment is done with a view to ensuring public confidence.[290]Katonya cites Jacob Gakeri’s exploration of the role of legal norms in the enhancement of securities markets in Kenya where he postulates that appropriate legal and institutional frameworks are necessary for securities markets to thrive and deepen. He highlights that the legal framework must ensure that relevant disclosure requirements are complied with.[291]
Gakeri further argues that whereas developing jurisdictions can learn from legal regimes of jurisdictions with deep and vibrant financial markets, such laws should not be replicated without testing their appropriateness.[292] He asserts that rules and institutions that function well in one country may not be appropriate in another because of the absence of supportive norms and corresponding institutions.[293] Therefore as much as there is a dire need for reform, the new regulations must not be simply transcribed into our states from another jurisdiction. The laws need to be home grown for them to be effective.
Disclosure has and will continue to be defended as the best remedy for GCG. Richard Frederick states that the quote by Louis Brandeis made in 1933 illustrates that the stability of global financial markets is an old preoccupation and a global one at that. He said it illustrates that the relevance of disclosure has not really changed since the 1930s.[294] He further argues that disclosure is an effective tool for improving investor protection.[295] It encourages better management which translates to better companies.[296] After Chase Bank was placed under statutory management, KDIC delegated its responsibilities to Kenya Commercial Bank (KCB) who acted as receiver manager of the troubled bank. KCB, working with the KDIC reopened all of Chase bank’s branches.[297] This is a textbook example proper management does work.
However, GCG can only be guaranteed through goodwill of the persons in management. The role that bank directors play is tied to Brandeis’ argument that the investor relies almost entirely on banker’s knowledge and judgment of the quality of a financial product and it is this which makes his relation to the banker one of confidence.[298] This is why the virtue ethics theory which focuses on the moral excellence, goodness, chastity, and good character is highly important.[299] Carrie Tolstedt, the company executive at Wells Fargo, who was allegedly responsible for directing employees to commit fraud, was sent home with a healthy package months before she could be discovered as a perpetrator of financial crime.[300]
This reprehensible fact is a testament to the immoral nature of the corporate world. Certain legal instruments contain provisions to rid the sector of such bad conduct. For example, the CBK Act has made provision for the assessment by the CBK of the professional and moral suitability of persons chosen to manage the bank.[301]This is of course not devoid of its limitations as the financial sector is still mired with scandal. However, the issue of morality and virtue ethics is relevant in regulation of banking practice.
6.0. CHAPTER SIX
6.1. CONCLUSION
This dissertation claims that corporate governance, the means by which corporate entities are controlled and managed, is essential to growth and sustainability. The argument goes on further to state that good corporate governance is a key tool in securing investments and guaranteeing profitability in business. It went to the extent of linking disclosure to corporate governance by showing that it acts as an incentive for good corporate governance as it ensures proper conduct of top executives in the exercise of their duties.
It highlighted the work of scholars in support of its argument. Fung for instance states that the importance of transparency has been widely recognized to ensure timely and reliable disclosure of financial information.[302] As a result, corporate governance has become more multifaceted and dynamic due to increased regulatory requirements and greater scrutiny.[303] This has generated an increase in responsibilities accorded to boards of directors and senior management which require that they abide by rigorous governance standards and also cope with increasing demand from shareholders and other stakeholders for transparency and disclosure.[304]
It was also shown that Kenya’s legal framework makes reference to corporate governance and disclosure and regulators play a major role in guaranteeing disclosure. Most of the principles found in statute are borrowed from international instruments such as the OECD Principles of corporate governance. As was clearly demonstrated, the Banking sector in Kenya may appear quite strict in theory but on the ground, it is far from it. Banks are being shut down, one after the other, top executives are collecting personal riches through fraud, the government is actively participating in financial crimes with the facilitation of the banks, and the depositors continue to lose money without spending it or putting it at risk. For instance, Imperial bank’s directors manipulated software to get rid of proof of fraud and the law had no way of anticipating such an occurrence.
It would have been extremely easy for legislative drafters to establish standardized rules that apply to all banks equally; unfortunately, there cannot be a compulsory set of rules of corporate governance by which banks must abide by. This would be too arbitrary and inflexible, since banks need to be given leeway to operate within a degree of discretion as operations vary from one institution to the next. This is why they operate under a regime of corporate governance best practices which encompass principles or policies and not laws. However, there can be a requirement of disclosure which steers away from controlling the management mechanism of the banks but in effect creates an incentive for GCG practices by compelling them to inform the public on how they manage and control money.
The limitations earlier stated indicate there is something a wry in the law. Furthermore, Griffith-Jones argues that in general, there needs to be more concrete and more effective financial regulation.[305] Frederick on the other hand, states that for disclosure to work as a governance tool, quite a number of elements need to be made available.[306]The first is establishment effective regulators with teeth that will provide enforcement that is effective, fair and unbiased. The second is existence of legal remedies to enable shareholders to assert their rights when they are violated either through civil or criminal procedures.[307] Third, standards should be present for example, accounting standards and financial reporting standards. The fourth is concerned with the accounting and audit profession. Financial data is reliable only because auditors check it first. They provide assurances regarding the information on which almost all our economic decisions are based.[308]
These are but a few recommendations that have been suggested by various scholars. The author of this dissertation makes two other recommendation that may be implemented if it is determined to be suitable. The first involves the establishment by the Committee on Finance and Trade in our National Assembly of a tribunal comprising of legal and financial experts from private sector and regulatory bodies that has the same powers as the courts. Such a body would then be charged with the mandate of holding public evidentiary hearings on banking scandals, exposing any if not all malpractices by senior management.
The second recommendation is that perhaps society as a whole should change its culture. Each individual should operate within the bounds of ethical business practice and teach others to do the same. Building personal integrity and ideals would be much more effective than legal instruments, which are too mechanical a solution. Both recommendations generate the perception of transparency, accountability and virtue ethics.
One accurate conclusion that can be made is that good corporate governance provides proper incentives for the board and management to operate in an ethical manner and this is realized best through the practice of disclosure. Fung stated that it is one out of the three principles of corporate governance. A reserved opinion that disclosure is not the main objective for financial institutions can be defended but what many regulators fail to understand is that disclosure, as opposed to being an element of corporate governance principles, should become the main agenda of management.
This dissertation’s ultimate conclusion is that senior management and boards of directors in exercising their mandate place the economic well-being of so many people at risk. Bank directors seem to be more concerned about making money for themselves, sometimes for their special investors, as opposed to helping their depositors manage their money and in the process teach them to do it on their own. The role of our financial stewards needs to be re-examined. Theirs is no longer a noble profession but one that is mired with greed and self-interest. It cannot be emphasized more that the banking business thrives where there is ethics and trust. Top level management in the sector must therefore be the greatest advocates for moral ethics not only through their words but their actions.
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[1] Benjamin Fung, ‘The Demand and Need for Transparency in Corporate Governance’ (2014) 2(2) Universal Journal of Management <http://www.hrpub.org> retrieved on 4th July 2016 74
[2] Benjamin Fung, ‘The Demand and Need for Transparency in Corporate Governance’ (2014) 73
[3] Merritt B. Fox, ‘Required Disclosure and Corporate Governance Source’ (1999) Vol. 62 No. 3 Duke University School of Law <http://www.jstor.org/stable/1192228> Accessed: 27-07-2016 115
[4] Fung (n 1)73
[5] Toronto Stock Exchange ‘Corporate Governance; A Guide to Good Disclosure’ http://www.ecgi.org/codes/documents/tsx_gtgd.pdf retrieved on 4th July 2016
[6] Fung (n 1)72
[7] ibid
[8] Paul Moxey and Adrian Berendt, ‘Corporate governance and the Credit Crunch’ Association of Chartered Certified Accountants (2008) http://www.accaglobal.com/content/dam/acca/global/PDF-technical/corporate-governance/cg_cc.pdf accessed on 9th December 2016 2
[9] Moxey and Berendt, (n 8) 2
[10] ibid
[11] Richard Frederick, ‘Disclosure: A Corporate Governance Tool That Really Works?’ (The Third Meeting of the Russian Corporate Governance Roundtable The Role of Disclosure in Strengthening Corporate Governance and Accountability, Moscow, 15-16 November 2000) https://www.oecd.org/corporate/ca/corporategovernanceprinciples/1920852.pdf accessed on 4th July 2016 1.
[12] Charles Mwaniki , 'Chase Bank shocks market with Sh8bn secret insider loans' http://www.businessdailyafrica.com/Corporate-News/Chase-Bank-shocks-market-with-Sh8bn-secret-insider-loans/-/539550/3149358/-/15aosjsz/-/index.html Business Daily (7 April 2016) accessed 17 October 2016
[13] Mwaniki, (n 12)
[14] ibid
[15] This statement compiles thought generated from a multitude of sources in print media, which I have researched and paraphrased in my own words to the best of my ability.
[16] Brian Wasuna, 'How imperial bank chief stole savers’ billions' Business Daily (28 October 2015) http://www.businessdailyafrica.com/-/539546/2932556/-/125aaufz/-/index.html accessed 17 October 2016; see also Mwaniki (n 12)
[17] The Kenyan Wall Street, ‘National Bank appoints four of its management team’ (The Kenyan Wall Street, 11 November 2016) http://kenyanwallstreet.com/national-bank-kenya-appoints-four-to-its-management-team accessed on 28 November 2016
[18] Mwaniki, (n 12)
[19] Mwaniki (n 12)
[20] Fauziah Wan Yusoff and Idris Aldamu Alhaji, 'Insight of corporate governance theories' (2012) 1(1) Journal of Business & Management http://www.todayscience.org/JBM/article/jbm.v1i1p52.pdf accessed 12 November 2016 53
[21] Louis Brandeis ‘What Publicity can do’ Harper’s Weekly (20 December 1913) http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1910/1913_12_20_What_Publicity_Ca.pdf accessed 17 October 2016 10
[22] ibid
[23] Fox, (n 3) 114
[24] Kiarie Njoroge ‘New CBK Governor, Patrick Njoroge assumes office’ Business Daily (26 June 2015) http://www.businessdailyafrica.com/New-CBK-governor-Patrick-Njoroge-assumes-office/539552-2766130-lmqpif/index.html accessed on 9 December 2016
[25] Alphonce Shiundu, ‘ Collapse of Banks: CBK employees get death threats,’ The Standard (18 May 2016) https://www.standardmedia.co.ke/article/2000202188/collapse-of-banks-cbk-employees-get-death-threats accesed 10 December 2016
[26] Brian Ngugi, ‘CBK Governor says how faith has influenced his life,’ Daily Nation (13 January 2016) http://www.nation.co.ke/business/CBK-Governor-interview/996-3031054-wxbe8tz/index.html accessed on 10 December 2016
[27] Yusoff and Alhaji, (n 20) 53
[28] Yusoff and Alhaji, (n 20) 52
[29] ibid, 74
[30] Fung, (n 1) 73
[31] Fox, (n 3) 113-114.
[32] Louis Brandeis, ‘What Publicity Can Do’ Harpers Weekly (1930) <http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1910/1913_12_20_What_Publicity_Ca.pdf> accessed on 1st August 2016 10
[33] Abhiman Das and Saibal Ghosh, ‘Corporate Governance in Banking System: An Empirical Investigation’ (2004) Economic and Political Weekly; Money, Banking and Finance Vol. 39 No. 12 1263-1266 <http://www.jstor.org/stable/4414805> accessed 27-07-2016 1263
[34] Katonya studies the securities market regulatory framework and enforcement paradigms arguing that although self-regulation is highly propagated, the system is government led.
[35] Anne Katonya, ‘Combating Insider Trading’ <https://su-plus.strathmore.edu/bitstream/handle/11071/3790/Combating%20insider%20trading%20in%20Kenya%E2%80%99s%20capital%20markets.pdf?sequence=1 > (LLM Project Paper, University of Nairobi 2012) 17
[36] Yusoff and Alhaji, (n 20) 52
[37] ibid
[38] ibid
[39] ibid
[40] ibid
[41] ibid
[42] ibid
[43] ibid
[44] ibid
[45] ibid
[46] Fung, ( n 1) 73-74
[47] Brandeis, (n 32) 10
[48] Frederick (n 11) 1
[49] Louis Brandeis, ‘What Publicity Can Do’ 12.
[50] ibid 12
[51] ibid 10
[52] ibid 12
[53] ibid 12
[54] ibid 12
[55] Fung, (n 1)72
[56] ibid, 73
[57] ibid, 75
[58] ibid, 75-76
[59] ibid, 75
[60] ibid, 75
[61] ibid, 76
[62] Iris H-Y Chiu*, ‘Reviving Shareholder Stewardship: Critically Examining the Impact of Corporate Transparency Reforms in the UK’ (2014) 38 Delaware Journal of Corporate Law, <http://papers.ssrn.com/sol3/papers.cfm/abstract2422578> retrieved on 12th July, 2016, 2
[63] Chiu*, (n 58) 3
[64] Brandeis(n 32) 12
[65] Fung, (n 1) 73
[66] Chiu* (n 58) 2
[67] Frederick(n 11)1
[68] Central Bank of Kenya, Prudential Guidelines for Institutions Licenced under the Banking Act January 2013, 37
[69] ibid
[70] ibid
[71] ibid
[72] Fox,(n 3) 115
[73] ibid 52
[74] ibid 53
[75] In 1997 Korea went through an economic crisis which was attributed to weak corporate governance structures. Before the crisis, the corporate sector was characterized by high debt and low productivity. Joh argues that this state of affairs was not sudden but had subsisted for a very long time. He further argued that once the problem was uncovered, the larger firms that had exhibited the weakest corporate governance structures were the ones saved by government and yet they were the culprits responsible for concealing accounting information making it inaccessible to investors.
[76] Das and Ghosh, (n 33) 1263
[77] ibid 1264
[78] Brandeis, (n 32) 12.
[79] Haslinda Abdullah and Benedict Valentine ‘Fundamental and Ethics of Corporate Governance’ (2009) Euro Journals Publishing, Inc.1450-2889 Issue 4 http://www.eurojournals.com/MEFE.htm accessed 27-07-2016 93
[80] Abdullah and Valentine (n 84) 93
[81] ibid
[82] ibid
[83] ibid
[84] ibid
[85] ibid
[86]Abdullah and Valentine, (n 84) 89
[87] Satosh Pande, ‘A Theoretic Framework For Corporate Governance’ (2014) 7(1) Indian Journal of Corporate Governance http://ijc.sagepub.com/content/7/1/56.full.pdf accessed 31 October 2016 2
[88] Pande, ‘(n 99) 1
[89] Yusoff and Alhaji, (n 20) 53
[90] Abdullah and Valentine (n 84) 91
[91] ibid
[92]ibid
[93] Yusoff and Alhaji, (n 20) 57
[94] ibid
[95] Pande, (n 99) 5
[96] Yusoff and Alhaji, (n 20) 57
[97] Abdullah and Valentine (n 84) 92
[98] Yusoff and Alhaji, (n 20) 56
[99] Abdullah and Valentine (n 84) 92
[100] Yusoff and Alhaji, (n 20) 58
[101] ibid
[102] ibid
[103] ibid 57
[104] ibid 58
[105] ibid
[106] ibid
[107] ibid
[108] ibid
[109] ibid
[110] ibid
[111] ibid
[112] ibid
[113] ibid
[114] Abdullah and Valentine (n 84) 93
[115] ibid
[116] ibid
[117] ibid
[118] ibid
[119] ibid
[120] ibid
[121] ibid
[122] ibid
[123] ibid
[124] Abdullah and Valentine (n 84) 94
[125] ibid
[126] ibid 93
[127] Ray Barrell and E.Philip Davis ‘Financial Regulation’ (2011) Sage Publications, Ltd http://www.jstor.org/stable/23881027 Accessed on 03-10-2016 F4
[128] Yusoff and Alhaji, (n 20)52
[129] Jacob K Gakeri, ‘Regulating Kenya’s Security Markets : An assessment of the Capital Markets Authority’s Enforcement jurisprudence’ (2012) International Journal of Humanities and Social Science Vol. 2 No. 20 <http://www.ijhssnet.com/journals/Vol_2_No_20_Special_Issue_October_2012/25.pdf> accessed on 19th August, 2016 266
[130] Jacob K Gakeri ‘Financial Regulatory Modernisation in East Africa :The Search for a new paradigm in Kenya’ (2011) International Journal of Humanities and Social Science Vol. 1 No. 16; <http://www.ijhssnet.com/journals/Vol_1_No_16_November_2011/18.pdf > accessed on 19th August, 2016, 165
[131] Gakeri (n 130) 165
[132] ibid
[133] Ibid 166
[134] Organization for Economic Cooperation and Development, ‘General guidance on A Policy Framework for Effective and Efficient Financial Regulation’ (2010) <https://www.oecd.org/finance/financial-markets/44362818.pdf> accessed on 2nd July 2016 7
[135] Central Bank of Kenya Act 2014, Preamble
[136] ibid, s.4
[137] ibid, s.4
[138] ibid s.4A
[139] ibid s.4
[140] ibid, s.4B
[141] ibid, s.4C
[142] ibid, s.10
[143] ibid, s.12
[144] ibid, s.36A(1)
[145] ibid, s.36A(2)
[146] ibid, s.43(1)
[147] ibid, s.43(2)
[148] ibid, s.54
[149] ibid, s.55
[150] The Banking Act, 2015, Preamble
[151] ibid, s.2
[152] ibid, s. 3
[153] ibid s. 3(2)
[154] ibid s. 43(3)
[155] ibid s. 32A
[156] ibid, s. 32(1)
[157] ibid, s. 32(2)
[158] ibid, s. 33A
[159] ibid, s. 8
[160] Central Bank of Kenya Act 2014, s. 57(1)
[161] ibid
[162] Central Bank of Kenya Prudential Guidelines for Institutions Licensed under the Banking Act of January 2013, 35 (Prudential Guidelines)
[163] Prudential Guidelines (n 174) 37
[164] ibid
[165] ibid, 66
[166] ibid
[167] ibid, 37
[168] Kenneth Kaoma Mwenda, ‘Legal Aspects of Financial Services Regulation and the Concept of a Unified Regulator’ (2006) <http://siteresources.worldbank.org/INTAFRSUMAFTPS/Resources/Legal_Aspects_of_Financial_Sces_Regulations.pdf> accessed on 19th August, 2016, 3
[169] Organization for Economic Cooperation and Development (n 146) , 7
[170] ibid
[171] ibid
[172] Banking Act, 2015 Cap 488 S. 8
[173] Fox, (n 3) 116
[174] Das and Ghosh, (n 33) 1263
[175] Wasuna,(n 16); see also Mwaniki (n 12)
[176] The Kenyan Wall Street (n 17)
[177] Mwaniki, (n 12)
[178] Khalfan Abdallah, ‘The Fall of Dubai Bank and Imperial Bank in Kenya: Key Lessons,’ (Linkedin March 1st 2016) https://www.linkedin.com/pulse/fall-dubai-bank-imperial-kenya-key-lessons-khalfan-abdallah-cife accessed on 5th December 2016
[179] ibid
[180] Wasuna (n 19)
[181] ibid
[182] Abdallah (n 178)
[183] ibid
[184] ibid
[185] Ibid; see also Wasuna (n 19)
[186] Abdallah (n 178)
[187] Richardson and David Limited v The Kenya Deposit Insurance Corporation and Central Bank of Kenya [2015]eKLR; See also Abdallah (n 190)
[188] Abdallah (n 178)
[189] Wasuna (n 19)
[190] Abdallah (n 178)
[191] ibid
[192] Business Daily Team, ‘Imperial Banks 53,000 account holders’ tales of pain and despair,’ Business Daily (Nairobi October 16th, 2015) http://www.businessdailyafrica.com/Imperial-Banks--53000-account-holders-tales-of-pain/-/539546/2916056/-/l578ekz/-/index.html accessed on 5th December 2012
[193] Business Daily Team (n 205)
[194] Owaahh (Owaahh February 12 2016) http://owaahh.com/the-sack-of-imperial-bank/ accessed 12 July 2016
[195] Wasuna (n 16)
[196] ibid
[197] ibid
[198] ibid
[199] Imperial Bank (Under Statutory Receivership of the Receiver Managers) v W.E. Tilley (Muthaiga) Limited and 19 Others [2016] eKLR; See also Wasuna (n 16)
[200] Wasuna (n 16)
[201] ibid
[202] ibid
[203] ibid
[204] Owaahh (n 207)
[205] Wasuna (n 16)
[206] ibid
[207] ibid
[208] ibid
[209] ibid
[210] David Herbling, ‘Why National Bank sent six executives on compulsory leave,’ Business Daily (Nairobi, March 30th 2016) http://www.businessdailyafrica.com/Why-National-Bank-sent-six-executives-on-compulsory-leave/539546-3138666-item-1-b0b00x/index.html accessed on 1th July 2016
[211] Herbling (n 224)
[212] ibid
[213] ibid
[214] ibid
[215] ibid
[216] ibid
[217] ibid
[218] ibid
[219] ibid
[220] ibid
[221] ibid
[222] ibid
[223] ibid
[224] ibid
[225] ibid
[226] ibid
[227] ibid
[228] ibid
[229] Brian Ngugi, ‘CBK put Chase Bank under receivership,’ The Daily Nation (Nairobi 7th April 2016) http://www.nation.co.ke/business/Chase-Bank-put-under-receivership/-/996/3149322/-/10xxpao/-/index.html accessed on July 2016
[230] Mwaniki (n 12)
[231] ibid
[232] ibid
[233] Ngugi (n 243)
[234] ibid
[235] ibid
[236] ibid
[237] David Herbling, ‘CBK seizes Sh. 8 Billion from Chase Bank Directors,’ Business Daily (Nairobi 29th, April, 2016) http://www.businessdailyafrica.com/Corporate-News/CBK-seizes-Sh8bn-from-Chase-Bank-directors/539550-3180718-494rc0/index.html accessed on 1 July 2016
[238] Herbling (n 251)
[239] ibid
[240] ibid
[241] ibid
[242] Brian Ngugi, ‘Big Chase Bank depositors call meeting to discuss delayed accessed,’ Business Daily (20th September 2016) http://mobile.businessdailyafrica.com/Corporate-News/Big-Chase-Bank-depositors-call-meeting-to-discuss-delayed-access/1144450-3388944-format-xhtml-rxqn46/index.html accessed on 1 July 2016
[243] Judith S Odhiambo, ‘Chase Bank (IR) Enters New Phase, Kicks off Due diligence Process,’ (Chase Bank, 27July 2016) https://www.chasebankkenya.co.ke/news-update/chase-bank-ir-enters-new-phase-kicks-due-diligence-process accessed on 1 July 2016
[244] Dan Mitchell, ‘These were the six major American Economic Crises of the Last Century,’ (Time, July 16, 2015) http://time.com/3957499/american-economic-crises-history/ accessed on 5 December 2016
[245] The Week Staff, ‘Wells Fargo's phony-account scandal, explained,’ The Week (17 September 2016) http://theweek.com/articles/649015/wells-fargos-phonyaccount-scandal-explained accessed on 5 December 2016
[246] Andrew R Sorkin ‘Pervasive Sham Deals at Wells Fargo, and No One Noticed?’ New York times (September 12th 2016) http://www.nytimes.com/2016/09/13/business/dealbook/pervasive-sham-deals-at-wells-fargo-and-no-one-noticed.html?_r=0 accessed on 5 December 2016
[247] The New York Times is an American Newspaper founded and published in New York City. It is owned by the New York Times Company and is one of the newspapers with the largest circulation in the United States.
[248] The Week Staff (n 260)
[249] Sorkin (n 261)
[250] ibid
[251] The Week Staff (n 260)
[252] ibid
[253] ibid
[254] Sorkin (n 261)
[255] The Week Staff (n 260)
[256] Sorkin (n 261)
[257] ibid
[258] ibid
[259] The Week Staff (n 260)
[260] ibid
[261] ibid
[262] ibid
[263] ibid
[264] The New Yorker is an American Magazine published by Conde Nast. It was founded in 1925 and is now published 47 times in a year.
[265] The Week Staff (n 260)
[266] Sorkin (n 261)
[267] ibid
[268] Das and Ghosh, (n 33) 1263
[269] ibid
[270] ibid
[271] ibid
[272] ibid
[273] Central Bank of Kenya Prudential Guidelines for Institutions Licensed under the Banking Act of January 2013, 35 (Prudential Guidelines)
[274] ibid
[275] Fox,(n 3) 115
[276] ibid 10
[277] Wasuna (n 16)
[278] Wasuna (n 19)
[279] ibid
[280] Wasuna (n 19)
[281] ibid, 76
[282] ibid, s. 32(2)
[283] ibid, 66
[284] ibid, 75-76
[285] Herbling (n 224)
[286] Herbling (n 224)
[287] Brandeis(n 32) 12
[288] Organization for Economic Cooperation and Development, ‘General guidance on A Policy Framework for Effective and Efficient Financial Regulation’ (2010) <https://www.oecd.org/finance/financial-markets/44362818.pdf> accessed on 2nd July 2016 7
[289] ibid
[290] ibid
[291] Katonya, (n 35) 25
[292] ibid 25
[293] ibid
[294] Frederick, (n 11) 1
[295] Ibid
[296] ibid
[297] Ngugi (n 243)
[298] Brandeis (n 32) 12
[299] Abdullah and Benedict Valentine (n 84) 93
[300] Sorkin (n 261)
[301] Central Bank of Kenya Act 2014 s. 43(3)
[302] Fung (n 1)72
[303] ibid
[304] ibid
[305] Stephany Griffith-Jones, ‘The Urgency of Reforming Financial Regulation Now,’ (2008) Economic and Political Weekly Vol. 43, No. 50 http://www.jstor.org/stable/40278281 accessed: 3rd October 2016 12
[306] Ibid 2.
[307] ibid
[308] ibid
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