The Role of the Central Bank of Kenya in Controlling Bank Failures An Investigative Study

Abstract

The purpose of this study was to assess the role of the Central Bank of Kenya in preventing bank failures. The study population was commercial banks and the Central Bank of Kenya and it combined both quantitative and qualitative approaches. The study population comprised 47 banks and 45 employees of Central Bank supervision department. Research was carried out on a sample of 7 commercial banks and 20 employees of CBK. Five questionnaires were distributed to key managers of each selected bank and 20 other questionnaires were given to Central Bank supervision department employees. The response rate was 100% in both cases. In order to establish further clarification and confirmation from responses derived from CBK supervision questionnaires, a face-to-face interview was conducted with CBK regulatory head of department. The study found out that commercial banks operate under the Banking Acts and that the board of directors of most commercial banks are effective in exercising their duties in the area of leadership, integrity, enterprise, judgment, and decision making in order to prevent the collapse of their banks. Further, both the Central Bank and commercial banks agreed that the main causes of bank failures are corporate governance malpractices, non-performing loans, political and government interferences, lack of transparency, corruption, fraud and macro-economic trends. The Central Bank of Kenya has played a significant role in the prevention of bank failures but there is need to amend the Regulatory Act to improve regulation and supervision. The study recommends that the Central Bank needs to develop effective monitoring tools and commercial bank lending and especially to directors should be subject to rigorous lending policy as prescribed by Central Bank.