Lessons for Kenya’s financial sector from the 2008 crisis

Is helping banks during an economic downturn a problem? No, not at all. Then, what was so shocking?

The political favouritism that banks from certain areas received the lion’s share of national government funding. New York and California banks received a huge share of the first rescue money. America’s Treasury Secretary at the time had spent 32 years in the New York banking sector.

National City Bank, as an example, closer to the middle of the country headquartered in Ohio did not benefit from the same political favouritism and was denied government bailout funds to stem the banking crisis. Instead, the US Government gave bailout funds to yet another east coast bank to buy National City instead of just providing the funds to National City Bank directly.

While politicians in Ohio questioned the national government, they did not collectively hold enough sway to affect a deal. In fact, banks around the country that were not as politically connected faced worse outcomes in getting bailout funds.

Corruption comes in many forms, including influence. A 2013 study in the Journal of Banking & Finance examined lobbying and political connections among banks seeking US national government support during the financial crisis. Banks that lobbied government personnel had a 42 percent higher chance of receiving the bailout money while banks with political connections had a 29 percent higher chance.

Every one of the eight financial institutions that received money on the first payout date had indeed lobbied during the preceding five years and had substantial political connections. Politically connected recipients also received support earlier on in the crisis and in larger amounts of bailout funds paid. So, quite literally, it paid to have political connections.

While the bank in our above example, National City, did lobby Washington DC, records compiled by the Center for Public Integrity put National City lobbying expenditure at a tiny $2 million between 1999 and 2008, all the while the large New York institutions and California-based Wells Fargo operated inside financial networks with far deeper and more regular contact with US national government decision makers.

Now, here in Kenya, how should our consumers think about the same issue of politically exposed persons owning our financial services firms?

While our Kenyan law does treat politically exposed persons (PEP) as a special risk category with our anti-money laundering regulations requiring financial institutions to identity PEP customers and beneficial owners of organisations, investigate those sources of wealth and funds in higher risk cases, obtain senior management approval and conduct additional monitoring.

The rules currently cover heads of state, whether here in Kenya or abroad, Cabinet members, senior public officials, immediate family members, and their close business associates. But this all refers to PEP as clients. What about if they own substantial shares in the financial institutions?

While, as you see, regulators do tell banks to scrutinise PEP customers, I also think customers should also scrutinise banks and insurers with significant PEP ownership. Roger Mayer, James Davis and David Schoorman’s famous organisational trust research gives us a useful way to unpack the PEP ownership problem.

Do political connections in your bank or insurance company help or hurt whether they have the ability to service your deposits, loans, or insurance claims? Does political exposure in ownership make the institution act more or less kind to you? Does the political exposed persons holding substantial shares in your bank or insurer make the firm have more or less integrity in dealing with you, the customer?

Join Business Talk as we commence a multi-week expose on the ups and downs of political ownership in our Kenyan financial services sector and the effects of whether consumers can trust such institutions. Send in your personal experiences to share via: [email protected]