Management Hubris & the Shock of Capped Interest Rates, by KIRIINYA KITHINJI

Management Hubris, Bank Interest Rates


President Uhuru's assent to the law capping interest rates (officially known as the Banking (Amendment) Act, 2015) is the ultimate nightmare for Kenyan banks.


Nevertheless, they should have seen it coming, and I would place the blame squarely on management hubris.


The top management of the banks clearly forgot or chose to ignore the good old "P" in the PESTEL analysis tool commonly used to analyze the attractiveness or otherwise of the overall business environment.


PESTEL stands for the political, economic, social, technological, environmental and legal factors that influence the business environment either positively or negatively.


Management hubris, or excessive managerial confidence, is often accompanied by the arrogant belief that management are incapable of making mistakes.


The runaway success of the banking sector appears to have driven top bank management to addict themselves to policies or actions that led to these achievements in the past, forgetting to take into account the gradual but subtle political changes that have been taking place in the overall business environment.


As with all addictions, the illusion of control remains long after addicts have completely surrendered their wills to the sources of their addictions.


Apparently, our elitist bank management teams and their even more elitist association underestimated the determination of the incumbent government to deliver on their electoral promises. In other words, they failed to take into account the political context of the business environment.


Enduring public resentment and a consistently hostile National Assembly should have alerted top bank managers to the fact that it was only a matter of time before the political guillotine landed on their necks.


To be fair to banks, management hubris is not a preserve of the top management of the banking industry. We witness similar mindsets in entrepreneurs who fall in love with their products that are of marginal interest to the market, business owners that fail to build the robust organizational cultures and systems that will outlive them, and our greedy political class.


We may also add to the list parents who continuously pamper their children and still expect them to turn out as responsible adults, drivers who routinely retort that "the car knows its way home" when advised not to drink and drive, empire-building religious leaders, the spectacular failure of our top military commanders at El Adde in Somalia, and "life speculators" (a term that I use to describe a particular class of people who believe that they can succeed in life by sequestering matters spiritual).


With an election coming up, it's no surprise that the Jubilee Administration is keen on securing its hold on power by implementing policies that bolster its credibility as a people-sensitive government and which resonate well with a sizeable proportion of voters.


Moreover, what better way to capture the hearts of voters across the political divide than by tapping into the palpable resentment and sense of helplessness that all Kenyans feel regarding the perceived exploitation by banks? Any astute politician knows that feelings of helplessness are keenly felt when people are faced with hegemonic institutions that enjoy immense asymmetric power relationships.


Consider the sense of powerlessness (no pun intended) that the many retail customers of Kenya Power experience whenever they have to deal with the firm. They desperately need the services of the State monopoly, but they are keenly aware of the little influence they exert on their desired outcomes once their service requests are registered with the firm. The response of the Jubilee Administration to this state of affairs? Power to the people!


I suspect that it is only a matter of time before Team Jubilee takes on the Safaricom Ltd hegemony with yet another populist rallying call: Tariffs to the people!


Even Jubilee's perennial political foe, Mr. Raila Odinga took the trouble to urge the President to sign the Banking (Amendment) Act 2015, and by so doing, he may have unwittingly handed over a couple of votes to the Jubilee team, including from his backyard.

The PESTEL model is one of the many tools frequently used by banks during their credit appraisal methodologies. Judging from their current state of shock, it appears Kenyan banks use the tool only on rote basis without applying any real analysis.


In one masterstroke, the President has used his constitutional powers to sign off a law that effectively creates an even playing field for all the banks, at least concerning their loan and savings products.

If my interpretation of the law is correct, all banks are mandated to apply the same pricing model to their lending and savings products.


The upshot is that consumers of savings and loan products will be free to choose whichever bank to deal with since all such products will be priced at the same level, irrespective of bank. The only distinguishing factor will most likely be the quality of service offered by the individual banks.


This level playing field principle is not new to the country, however. The practice has been around in the petroleum retailing industry for some years.


For instance, I can count four fuel stations within a short radius from my workplace, but the price of fuel is the same. Based on this fact, my choice of where to fuel my car depends on other factors such as proximity to my office, or friendly staff, or even the level of congestion that I expect to find in any of the stations.


The new banking regime is analogous to what has been happening in the petroleum retailing industry.

In the language of strategy, the President has effectively commoditized the banks' savings and loan products.


Business strategy experts will tell you that commoditization occurs when markets sell products that are that are easily substitutable.


Product substitutability is in turn driven by (product) standardization and price transparency.

Whether intended or not, the Banking (Amendment) Act 2015 has effectively created precisely the two features that drive substitutability and by extension, commoditization.


Consumers of lending and savings products will now be able to compute loan and savings rates simply by keeping track of the movements in the Central Bank Rate (CBR).


The new interest rates capping regime will not spare lazy pensions and insurance fund managers (who invest a significant amount in bank deposits) either. Such managers will be hard put to explain to pension funds membership or life assurance policyholders why their savings cannot at least earn the equivalent of 70% of the average Central Bank Rate considered over a relevant period.


What kind of response should we expect from the banks?


Well, more hubris, perhaps?


One possible answer is that banks could engage in cartel-like behavior aimed at protecting their turf.  Fortunately for the consuming public, the anti-competition watchdog can be strengthened through additional funding or capacity building to execute its mandate in protecting bank customers.


Alternatively, members of the public who prefer the litigation route can apply for writs from the High Court to compel the watchdog to execute its legal mandate.


Another possible and potentially lethal reaction would be the relaxing of lending standards to drive the uptake of loan products (which are the banks' primary source of income). It is a well-known fact that the Global Financial Crises of 2007-2008 were primarily triggered by loose lending standards that consistently ignored the poor creditworthiness of many of the borrowers.


Another possible response would be the doubling of efforts to downsize or hire temporary staff from outsourcing companies. The problem here is that many bank staff are unionisable, and showing them the door is a complicated process involving militant positional bargaining with the banking unions. In addition, the use of outsourced services is fraught with risks such as the failure of contracted staff to assimilate into existing organizational cultures, or their lack of loyalty.


Hopefully, banks will choose the more viable geographical and product diversification strategies and continuously invest in improving the service levels across their numerous customer touch points such as banking halls, websites, mobile-based apps, agents, call centers, and even back-office operations.

Lastly, the government should take urgent steps to drive down its ravenous appetite for domestic borrowing, which is one of the drivers of the general interest rates in the economy.  


Kenyans must not be made to pay a management hubris premium on their borrowing rates arising from the economic missteps of the Jubilee Administration. And on this matter, the buck must surely stop with the President.


Mr. Kiriinya is the Director of Strategy and Advisory at Wylde International, Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it.