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Corporate Governance: The emerging Strategic Asset after the Banking Crisis.

  Apr 28, 2016

Last week we discussed the Strategic implications for Kenya’s banking sector in the wake of the banking failure. It became apparent that there is panic in the banking sector. The sector came under intense pressure with others suggesting that there will be need for mergers and acquisitions among other forms of strategy alliances to cushion the bank against liquidity risks. Others also suggested that banks might have to go for more cash call and even rights issues to deal with the current cash crisis. In as much as it is understandable what some of the industry experts seems to be suggesting, I am for the opinion that what we need is to put our finger into the exact problem the sector is facing. Is the banking sector facing cash crisis or credit crunch and what is the difference? There is no clear-cut distinction as they are closely interconnected but there is little difference, and long live the little difference.

The financial crisis refers to the problems in the finance sector. In particular this involves the mortgage defaults and rise in bank losses leading to a decline in bank lending capacity and it can be as worse as the bank not capable of coping with its financial obligations, the case of chase bank in Kenya. However, the credit crunch means that creditors have lost trust, credit in the financial sector hence they make their funds unavailable to the lending institution. This is even clearer if we understand the bank’s core business model, which is transferring money from those with surplus (creditors) to those with deficit (debtors) and making money in the process. Having said that, it is apparent that the bank run that lead to chase bank being unable to have the prerequisite liquidity to continue operation took place more because of the credit crunch than financial crisis. To confirm, the central bank of Kenya (CBK) moved to steady the banking sector by providing a facility that banks would use to ease their liquidity pressures.  In fact the social media never fueled the financial crisis but they fuelled the credit crunch, eroding trust people had in the bank that lead to the bank run. In that regard, through route cause analysis, the problem in the banking sector is primarily credit crunch that created a secondary problem of financial crisis that could shift to a tertiary level of economic crisis if not well dealt with. That’s why the CBK governor said severally that Kenya’s banking sector is solid, the Kenya bankers Association had to sponsor a full page on daily newspaper stating that they have confidence in Kenya’s banking system, this was to address credit crunch, not financial crisis. In fact, in early 2008, many felt that the global financial crisis would be limited to the banking sector and the housing market. However, the shortage of credit had a very powerful impact on the real economy. Because banks were not lending, investment and consumption fell contributing to a serious economic recession.  In that regard, it is this fall in GDP / Economic output which made a financial crisis into an economic crisis, the route cause being credit crunch. If this argument is anything to go by, there is a need for corporate Kenya especially the banking sector to realize the emergence of its key strategic asset, corporate governance.


The banking sector has been notorious for the level of profitability it wants to report every year in media press briefings and also in the daily newspapers. It is true the banking sector in Kenya is arguable the most profitable in Africa with a return on capital of about 30%, way beyond our neighbors such as Uganda, Tanzania and Rwanda that range between 15 and 25. However, boasting of profitability will slowly seize to be an indicator of doing well. Corporate governance will be a key differentiator. This is because corporate governance assures creditors hence solve the causa causarum (cause of causes) of the sectors problems. This is because in as much as I agree with some experts in the industry that profitability of a bank is an indicator of a safe bank to bank with, corporate governance, which solves the credit crunch issue, will be a key differentiator.  This is because corporate governance should assure us of corporate direction, compliance, transparency and oversight. This will make us start seeing many corporates being more open about their governance and transparent about their directors. That means that the error of invisible hand is for sure gone and corporate directors must come to the limelight to give their corporates credit for financial power rests with creditors, not debtors, not even regulators.

Written by:

Dr. Fredrick Onyango Ogola ,
Senior Lecturer- Strategy and Competitiveness
Academic Director – MBA Programs Strathmore University
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