Last week in Business Talk, we commenced a multi-part series on financial services firms in Kenya with politically exposed people owning or controlling substantial shares in the company. More politically exposed banks in the US, as an example, yielded political benefits by receiving substantial government bailout funds during their last financial crisis.
Utilising famed organisational researchers Roger Mayer, James Davis and David Schoorman’s trust framework of ability, benevolence, and integrity, let us look at whether political exposure helps or hurts our financial services firms.
Political exposure can often strengthen public perceptions in the safety of their savings in financial institutions. Depositors can look at a bank that is partly or majority owned by powerful political families and reach the conclusion that those influential owners will fight hard behind the scenes for the respective government to keep the institution alive, especially during a financial crisis.
As an example, borrowers and savers have historically flocked to Uganda’s First Lady’s UWESO Micro-Finance institution for some of these reasons.
In Kenya we remember the trauma around the bank collapses of Dubai Bank Kenya, Imperial Bank, and Chase Bank Kenya.
If the shareholders had more political clout, would the Central Bank of Kenya (CBK) and the Kenya Deposit Insurance Corporation still have liquidated them or placed them under statutory management? Or might they have received bailout funds in a Western-style rescue? The National Bank of Kenya had a share swap acquisition.
While bank failures in Kenya are rare given the strength of our CBK regulation and protection for depositors, what about the credit side of banking? A politically exposed bank might be more likely to get away with unsavory lending practices that border more on shylocks.
In reaching out to students, colleagues, and those in my professional network, I was appalled to see a trend by the more politically exposed banks in apparent disregard of CBK rules as well as abandoning benevolence toward borrowers and failing integrity in disclosures and transparency.
CBK carries very clear guidelines that banks must provide the exact terms and conditions of loans to the borrowers. But politically exposed banks seem more likely to fail to provide loan agreements promptly. Borrowers get referred to generic terms appearing on a website rather than specific terms that govern their own loans.
These banks also seemed to fail to provide key loan disclosures in a key facts document even showing interest calculations.
When loans are done digitally, but then the particular bank’s mobile app blocks screenshots by the prospective borrower, then the borrower cannot retain the legally required copies of the loan agreement. Then when borrowers reach out, the banks seem to not provide the actual loan terms and conditions that appeared on the mobile app at the exact time the loan was taken.
Further, when loan officers fail to follow even the most generic loan rules contained on their websites, there is often no felt recourse for borrowers at politically connected banks. Collections officers and auctioneers spouting “what can you do about it” has been reported more than once.
A customer of such banks reported with evidence that their current account was frozen even though their loan was current.
Generic loan terms that borrowers get referred to often have contradictory and unreasonable terms such as different notice periods within the same document, broad shocking liability exclusions, and extensive powers to restrict other accounts even without notice.
Politically exposed banks also seemed more likely to use auctioneers without providing data protection proof of those auctioneers compliance with Kenyan laws
. In one case, an auctioneer firm called a borrower of a politically exposed bank over 30 times in one hour and the loan was less than 60 days past due as the borrower was delaying payment due to a formal complaint to the bank and CBK about not receiving loan documentation or a loan schedule of payments.
Even though CBK prohibits unconscionable or unreasonable terms and requires fair, clear, and very transparent contracts, how can a borrower push back against a politically exposed bank and file complaints that get heard and acted upon?
Additionally, many banks require borrowers to commensurately purchase loan insurance that is built into the loan costs in the event that the borrower passes away or loses their job.
But in another situation with provided evidence from a borrower at a politically exposed bank, despite a documented job loss due to redundancy, the bank refused to provide an insurance payoff even though the branch said that the loan should be paid by the insurance on account of the job loss.
Upon challenging the head office as to why no insurance was paid to cover the loan despite paying for the loan insurance when the debt commenced, the politically exposed bank refused to provide the name of the external insurer that supposedly insured the loan and refused to provide the insurance policy.
The bank flatly stated to the borrower, “you can only go complain to the Insurance Regulatory Authority and just see if they will do anything”. But a debt holder cannot go to IRA without even the name of the insurer or the policy details.
Political exposure can therefore work very differently depending on where a banking customer sits. A depositor may see powerful owners and feel more confident about the survival of the bank while a borrower may see the same owners and wonder what happens when the bank needs discipline.
Read Business Talk next week as we continue our multi-week expose on political ownership in our Kenyan financial services sector and delve into the mystifyingly cryptic insurance annuity business.
Have a management or leadership issue, question, or challenge? Reach out to Dr. Scott through @ScottProfessor on Twitter or on email [email protected] .
