CENTRAL BANK OF KENYA
7TH KENYA BANKERS ASSOCIATION ANNUAL BANKING CONFERENCE
Thursday, September 27, 2018
Keynote Address by
Dr. Patrick Njoroge, Governor, Central Bank of Kenya
As Prepared for Delivery
Good morning! I want to begin by thanking the Kenya Bankers Association
(KBA) for inviting me to speak at this auspicious Annual Banking Conference. I
applaud KBA for organizing this conference for the last seven years, and
contributing to thought leadership on topical banking sector issues.
The theme of the conference ‘‘Credit Market Dynamics in an Evolving
Regulatory and Market Participants’ Environment’’ is quite apt given the
conjuncture—where the global, regional and national financial markets are today.
For instance, in Kenya, there has been considerable discourse recently on the cost
and availability of credit. The discussion is now morphing to the potential role of
disruptive non-traditional credit providers that leverage on technology, but
discussions about consumer protection in these new environments has not gathered
much steam. However, I am informed that these issues will be discussed during
the conference and I look forward to the findings.
The year 2018 has been a year of anniversaries. On August 7, we marked twenty
years since the bombing of the American Embassy in Nairobi, just a few steps
away from the Central Bank building. And just a few days ago, on the 21st of
September, we marked the fifth anniversary of the Westgate attack. Both of these
were tragedies, marked with sombre reflections by our fellow citizens.

We marked another recent anniversary that is less familiar to many ordinary
Kenyans, but one that is felt acutely by practitioners in the financial sector. Ten
years ago, on September 15, 2008, the storm that had been brewing for a year
finally broke. Lehman Brothers, a company that had been in existence for one
hundred and fifty eight years, shut its doors. Ordinarily, companies come and go.
After all, creative destruction is the mantra of the day and only the fittest survive.
New blood, new ideas and new companies are essential to the health of capitalism,
and, conversely, old ideas and old companies must be discarded when the time
comes. But, of course, Lehman was different. The canary in the coal mine was
dead. The deluge was upon us.
The effects of the global financial crisis were deep, powerful and lasting. Some are
being felt to this very day. The ordinary citizen—Wanjiku—may not give you the
precise details of what happened ten years ago. She may not speak of
“systemically important financial institutions” or tell you what a subprime
mortgage is. She may not speak eloquently about collateral debt obligations, or
calculate the point at which a bond goes from investment grade to junk. But
Wanjiku, the ordinary citizen that all of us serve, understands some fundamental
facts. She understands the fundamental principles of finance, commerce and social
interaction. She understands some basic principles that are easily forgotten,
ignored, or overlooked in the pursuit of sophistication or profits. The rest of my
remarks will expand on this idea.
In the recent weeks, there has been extensive debates on the lessons from the
global financial crisis and whether the global financial system is now safer. These
discussions have also asked whether a sense of exuberance is creeping back into
the global financial system, that could unwittingly lead us to the next crisis—
another “Minsky moment” where current booms sow the seeds of a future
dramatic collapse. These are questions I will leave for participants of the
conference and I would be keen to know your thoughts.

In diagnosing the cause of the global financial crisis, a lot of ink has been spilled
on the inadequacy of regulation and the trend towards deregulation in the lead up
to the global financial crisis. Regulation, especially regulation that recognizes and
acts on risks, is crucial. And we all appreciate the major drive globally towards
strengthening the regulation and supervision of global financial markets. But let’s
also appreciate the following crucial fact—at its core, the global financial crisis
was about human beings. What human beings chose to do and what they chose not
to do. At its heart, the global financial crisis was about ethics.
Ethics is not a financial term and conjures up difference images and responses by
for different people and different responses. Some in the audience may be
thinking: of course my institution is highly ethical—we have rules! Our legal team
always ensures that we comply to all laws and regulations! We won a governance
award the other day! Our values are printed and displayed in our headquarters!
Our email signature tells the world that we are guided by good principles! Even
more, we are renowned for training our staff rigorously on our code of conduct!
While all these may be related to the core message of raising our ethical standards,
I believe there is a need to think deeper, dig deeper, and be more earnest on this
matter.
While the business of defining ethics can be left to philosophers, we can agree on
the more pedestrian description given by the renowned American humanist Aldo
Leopold: “Ethical behavior is doing the right thing when no one else is watching
even when doing the wrong thing is legal.” Many of you may be wondering why
laws cannot be put in place to prevent unethical behaviour once and for all.
Wonder no more—life is more complex than rules. Misconduct happens first and
laws are passed later—as we have seen elsewhere, innovation generally goes
ahead of regulation. There is therefore need for something else besides a set of
rules to control the behaviour of people and institutions: we need to understand
and pursue ethical values. A lot has been said about this in the aftermath of the
global financial crisis.1 Let me touch on three areas for your reflection.
1

First, institutions need to develop a responsible corporate culture that entrenches
proper market conduct. Culture that goes beyond neat slogans to actually being the
guiding force that leads to ethical behaviour and ethical outcomes. You may say
the right thing on your corporate culture statements and governance code of
conduct declarations, but if your employees know and are told day after day that
profit is the only motive, they will behave accordingly. If they notice that customer
needs take second place to corporate profit, nothing stops them from treating
customers in a similar fashion—badly—in pursuit of expanding the bottom line. If
they see rules bent, and notice that the most ruthless are the ones who get the pat
on the back, the promotion and, ultimately, the corner office, they will behave in
ways that show the greatest rule breaking and ruthlessness.
The banking sector’s role in economic development calls for a balance between
pursuit of economic profit and serving the community in an environment of shared
prosperity. When financial institutions start to embrace excessive risk and
questionable practices, they stop performing their ethical-social function, which is
necessary for society’s prosperity. Codes of Conduct by players or industry
associations should include relevant aspects of ethical behaviour of all
stakeholders including employees, customers, suppliers and competitors, local
communities, and owners. Each of these stakeholders play a role in success or
failure of their institutions.
Second, transparency is at the centre of ethical behaviour. All relevant
information must be explained even if it is more than what is required by law.
Over the years, customers have complained over the lack of transparency in the
pricing of products and services by banks. I acknowledge you are making positive
steps in this area, but much more remains to be done. This is particularly in the
area of credit risk pricing. Customers need to be clear on what their credit
reference record means for them in the pricing of credit. Beyond product pricing,
you need to be transparent on your governance, business models and risk and
reward trade-offs particularly in respect to compensation policies. And this cannot

be driven by enforcement by the regulator. You, the people in this room, must be
the ones to go above and beyond the strict interpretation of transparency rules.
Third, compliance without integrity is futile. Compliance with codes of conduct
and other means of self-regulation are good. But this is only useful when the focus
is on a shared mentality of integrity that goes beyond mere compliance. The
mentality of “we comply” for compliance sake cannot sustain a business for long. I
remind you of another anniversary, but this one of a much more recent event. Two
weeks ago yesterday, we informed the Kenyan people of the action we took
against some of you because of non-compliance with integrity laws. Make no
mistake – it was not easy. We considered all the possible negative outcomes that
could be triggered by those actions. Ultimately, however, we did not hesitate, and
would not hesitate to do it again, under similar circumstances. Banks must steer
away from being used as conduits for ill-gotten funds. The Kenyan people –
Wanjiku – demand that of us, and will treat us very unkindly, were we to look the
other way.
The reason why there is such palpable disappointment – I dare say it extends to
anger – from the ordinary citizen to you in this room is exactly that. Wanjiku feels
that her banker prefers expediency to empathy. She feels that her banker would
rather hunt for a loophole than show leadership. Would rather seek supernormal
profit than search for solutions. The old adage about the banker asking for their
umbrella back when it starts raining may have been funny once, but not when the
rain is this heavy, and when Wanjiku already has a flu.
So I ask you to reflect on your work, and your conduct. As Kenyans, we would
rather watch with pride, and gasp in admiration, when Eliud Kipchoge becomes
the fastest marathoner in history, than wonder anxiously whether our banker will
be with us in the long haul. We would rather spend our energy thinking of ways to
increase and share our prosperity than despairing about whether we are all in this
together.

We must do better. We must be the guiding light for the banking and financial
sector and for this great country we all call home. This would be very easy if we
all insist on ethical practices and putting Wanjiku before anything else. I want to
finish with an idea that is attributed to the philosopher Immanuel Kant: “May you
act so that the principle of action might safely be made a law for the whole
world.” Had this advice been heeded in the run up to 2007, the Global Financial
crisis would have been averted. The Queen of England would also not have asked
the professors at the London School of Economics in November 2008: “If the
[antecedent of the global financial crisis] was this bad, why did nobody notice
it?”
It is now my distinct honour to declare the 7th KBA Annual Banking Conference
officially opened.
Thank you for your attention.