Heads or tails? Prof Ndung’u’s chequered scorecard

By NBM reporter

After two four-year terms at the helm, Prof Njuguna Ndung’u’s tenure as Central Bank of Kenya governor has finally come to an end. His exit will mean different things to different people. His regime has been dotted with controversies that have clouded the monetary policies which, many agree, have improved economic fundamentals. 

And so how he walks out of his office on March 4 will depend on what critics and supporters choose as his legacy. Bankers, for instance, will applaud him. He is now one of the most admired bankers on the continent after being named Central Bank Governor of the Year, Sub-Saharan Africa, 2014, erasing the 2011 stain when he was ranked Africa’s worst governor as interest and exchange rates and inflation went wild, hurting consumers and businesses.

Nzioka Kibua, a former deputy governor at CBK, says Prof Ndung’u earns high grades for introducing an enduring turnaround in Kenya’s banking system. Banks grew during his tenure as financial penetration deepened, especially so after he approved the launch of M-Pesa and other mobile money transfer services and agency banking. 

“The gentleman did it excellently,” Mr Kibua said of Prof Ndung’u in an interview with the Standard. “Today, no bank is under stress; banks are opening branches almost everywhere. The country has a fairly strong banking system.”

In 2008, at the height of the global financial crisis that shook European and American banks – denting big players such as Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, the Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance and Leicester and snaring giants like Lehman Brothers – Kenya’s financial institutions escaped with only bruises. 

“This is because Prof Ndung’u is an economist; he performed brilliantly on this front despite tough political challenges. His predecessors failed on this,” he said.

In person and even as CBK governor, Prof Ndung’u is not known for being talkative. Partly because of his reticence, whatever few public remarks he made were studied reverentially.


Exit welcome

Yet Prof Ndung’u displayed a whole different side, allowing himself to get caught up in a spectacular, all-too-public squabble with politicians over deteriorating economic indicators such as high inflation, weak shilling and rising interest rates. 

“Policy making is very challenging,” he said in an interview with Forbes Africa. “You have to understand what the right policy is and understand what tools to use.”

Used to a sober environment while he lectured at the University of Nairobi, and when he worked for Kenya Institute for Public Policy Research and Analysis (Kippra) and the African Economic Research Consortium (AERC), he found himself between competing political interests. And that, in fact, is what will largely define his legacy.

“Indeed, if there is anything that Prof Ndung’u has done well over the past few years, it has been on the monetary policy,” says Mohamed Wehliye, Senior Vice President, Financial Risk Management, Riyadh Bank, Saudi Arabia and a commentator on financial and economic issues. 

“Kenya did have hiccups in terms of growth, naturally, during and after the post-election violence and suffered some effects of the global financial crisis of 2007/8, coupled with severe drought, Euro zone crisis and the Arab Spring, but the monetary policy has generally been well managed.”

He will be remembered for establishing the Monetary Policy Committee (MPC), which has maintained the pulse of the economy, stimulating various sectors to stabilise growth. Keeping interest rates low at a time of heavy government borrowing from the domestic market has been one of its greatest achievements during Prof Ndung’u’s first term, says Mr Wehliye.

The second term, however, was far more problematic for Prof Ndung’u as inflation skyrocketed. This was attributed to supply bottlenecks as well as a surge in global food and fuel prices, the factors that are largely beyond the scope of the monetary policy. While inflation has dropped, thanks to a change in the way the cost of living is calculated, the impact is yet to be felt by households. The cost of living has been fairly high.


Let down consumers

On interest rates, Prof Ndung’u failed miserably. Indeed, most Kenyans have been complaining of very low returns on deposits yet the cost of borrowing remains comparatively high. Currently, the spread – the difference between interest rate charged by banks on loans and the interest rate paid by commercial banks for savings deposits – is about 16 per cent, one of the highest in Africa. 

“This problem, though thorny and lasted for long, was rarely tackled. Importantly, non-interest charges on customers, which border on criminal charges, have been conspicuous. That is why commercial banks are making huge profits,” says Dr Kibua. “Sadly, Prof Ndung’u is leaving the office having done nothing on this.”

His backers say he was let down by the banks. While the governor has created the macro-economic stability required and constantly urged the banks to improve their efficiency in order to reduce their lending rates, the banks obeyed MPC signals in breach. 

“Although the governor’s powers are limited given the liberalised interest rates regime, there is a general perception that the governor could have worked even more closely with the commercial banks and, through moral suasion, encouraged a consensus on what constitutes reasonable lending rates,” says Mr Wehliye.

Dr Samuel Nyandemo, an economics lecturer at the University of Nairobi and a critic of Prof Ndung’u’s economic model says the governor was courting disaster and his exit gives the economy a chance to get fresh breathe. “He has been a workmate, and I look forward to teaching with him again; he’s an excellent teacher,” he told Standard newspaper.

It is under his tenure that a lot of scandalous transactions took place at the Central Bank, in which the country lost billions of shillings. The Cockar Commission, established to investigate the sale of the Grand Regency Hotel, found out that “the entire transaction was tainted with misrepresentation and deception to such an extent as to warrant specialised investigation by the Attorney-General and other relevant institutions into different aspects of the transaction.” 

The report nailed then Minister of Finance Amos Kimunya and Prof Ndung’u, stating that the governor was not truthful to other public institutions, notably the Kenya Anti-Corruption Commission, the Land Commission, the Public Procurement Oversight Authority and the Prime Minister about the sale of the hotel. The Finance ministry sold the five-star Grand Regency Hotel for Sh2.9 billion, three times lower than its estimated value of Sh7 billion.

 “Unfortunately, this report was never made public as the previous regime continued protecting the wrongs of Prof Ndung’u,” says Kakamega County senator Dr Boni Khalwale, who was chairman of the Public Accounts Committee that, in 2012,  declared Mr Kimunya and Prof Ndung’u unfit to hold public office for  flouting the Public Procurement Act.

The scandal, where Kenyans lost more than Sh1.8 billion in a money printing deal with De La Rue, could be the biggest blight on Prof Ndung’u’s legacy. The CBK used Sh10.2 billion to procure 2.6 billion bank notes from De La Rue between March 2003 and December 2011 through expensive stop gap orders. Under Prof Ndung’u, CBK continued to enter into and awarding of irregular contracts to De La Rue Currency and Security Print Limited on direct basis without regard for the Procurement Act.

An audit contained in a report by the Public Accounts showed that the 2006 deal would have seen the currency printed from Malta at a cheaper cost. The loss arising from using interim stop gap orders after the cancellation of the international tender for supply of 1.7 billion new generation bank notes is estimated at Sh1.83 billion.


As he exits, focus will turn on his successor. Analysts predict that the position will be filled based on political inclinations, and that his deputy governor, Haron Sirima, may be bypassed.

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