High expectations for the new central bank governor of Kenya.
On Friday, President Kenyatta formerly appointed Dr. Patrick Njoroge as the new central bank governor. His appointment came 4 months after the former governor, Dr. Njuguna Ndung’u retired from the post he has held for the last 8 years. The new governor has an in-tray full on a number of issues that the country is facing.
In the last few months, the Kenyan currency has fallen against the dollar. Early this month, the currency traded at a 5 year low of sh 98. The currency has also eased against all the other currency majors. This makes it one of the worst performing currency in Africa.
The fall was attributed to a number of factors including a weak trade balance where Kenya imports more than it exports. In addition, the rate of inflation has risen to 6% which is attributed to low interest rate.
Following the 5 year low, the monetary policy committee decided to increase interest rates to 10% to cushion the currency. The reaction was welcome as the shilling strengthened marginally against the majors (Euro and Pound).
In economics, low interest rates leads to more borrowing which leads to increased spending. Increased spending (using borrowed money) leads to increase in prices of commodities and services. This increase is called inflation and when it is left to increase, most people can be affected.
Dr. Njoroge is now expected to chair the monetary policy committee to chant a new wave for the Kenyan monetary policy which could lead to rates increase.
In the Kenyan budget read earlier in June, the cabinet secretary proposed to increase the base capital requirement for banks and insurance companies. In the next 3 years, banks will be required to increase their base capital from sh. 1 billion to sh. 5 billion. The aim of doing this was to create large institutions and promote consolidation in the financial sector.
During his interview, Dr. Njoroge was tasked to give his opinion on the move by the cabinet secretary. “I believe the move will lead to serious implications in the financial sector. Small banks that serve a niche market will be forced to shut down leading to serious job losses in the sector. I will propose a reversal to this strategy,” he said during the interviews.
According to Dr. Martin Oduor, the former CEO of Kenya’s biggest lender, the move has very significant to the Kenyan economy. He suggested that the creation of large banks will lead to a more stable economy.
Analysts believe that the new CBK governor will have a huge task of filling the shoes of his predecessor who is credited for positioning Kenya as a leading financial services hub in East and Central Africa. During his tenure, the financial sector has been a main performer in the Nairobi Securities Exchange.
Njoroge, who is a bachelor and who has no investment (including a house) in Kenya has more than 20 years’ experience in the IMF where he has served in various positions such as: advisor to the Deputy Managing Director, Deputy Division Chief Finance department, mission chief for Dominica Republic and senior economist. He attended Strathmore University, Nairobi University and Yale.
Following his official approval, the shilling and the Nairobi All Share Index gained marginally.