The effectiveness of risk based supervision as adopted by the Central Bank of Kenya

Abstract

This study was carried out to achieve two objectives namely, to establish the effectiveness of Risk Based Supervision as adopted by the Central Bank of Kenya and challenges experienced during the implementation of this supervisory methodology. The primary data on the effectiveness of risk-based supervision was obtained from Bank Supervisors at the Central Bank of Kenya. The data was analyzed using Ms Excel statistical package and SPSS to obtain perspectives of cost elements incurred during the implementation, the benefits and challenges experienced with the adoption of the new methodology. The results realized from the study showed that risk based supervision led to reduction in number of days in inspecting a commercial bank, the number of staff per inspection team were reduced from an average of six supervisors to three, increase in training costs as supervisors are continuously trained and attached in other regulatory institutions abroad and educating risk managers in commercial banks. Hence the overall conclusion was that there is significant cost savings to Kenya government, as it has not intervened to resuscitate problematic banks in the recent past since Central Bank adopted Risk Based Supervision. Though it should be noted that a collapse of commercial banks cannot be prevented by strong regulation and supervision alone, other economic factors may trigger insolvency among the commercial banks. The study also identified other grey areas that need research particularly on financial institutions engaged in activities regulated by more than one financial regulator, for instance a bank engaged in stock brokerage, insurance, real estate and asset financing. Challenges relating to information asymmetry faced by regulators continue to be an inherent impediment to achieving a sound and stable financial sector.