OPINION:BILL TO END OPACITY IN FINANCIAL AND MONETARY SYSTEM OF CBK

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It is an open secret that the proposed Draft CBK Bill 2014, now before the stakeholders for debate, portends well for new Central Bank governance.

A key highlight in the proposal and the one that has become standard practice for many organisations in the country is the creation of a corporate governance framework with board of directors charged with the formulation of policies,their implementation and supervision of the administration and operations of the Central Bank subject to the Constitution of Kenya.

Compared to the old CBK Act (2009), where the governance and management of CBK was concentrated on the Governor who doubles up as the chairman of the board and the CEO, an arrangement which obviously creates a lacuna in governance inefficiencies and subordinates transparency in the management and operations of the Central Bank.

The Draft Bill proposes a clear demarcation of the board’s functions, those of the Monetary Policy Committee(MPC) and also the Governor of Central Bank. In a modern monetary system like ours, checks and balances in our processes and practices are required for accountability and efficiency.

In most commonwealth countries the world over, the practice is that central banks have oversight boards. Of paramount importance is that the draft CBK Bill 2014, clearly lays down procedures devoid of political manipulations for the appointment of the chairperson, board members, the governor, deputy governors and external MPC directors are also well stipulated. If this appointment process is followed, chances are very competent management will be recruited.

The draft creates a more autonomous CBK, which is able to discharge, its functions more independently without political interference.The procedure on appointment of these strategic office holders require that a selection committee of the CBK board forward the three names to the President for nomination. Cognizant of the current constitutional order which aspires for public participation, the President then forwards his nominees to Parliament for consideration and approval or rejection.

The Draft Bill also provides that there shall be a Monetary Policy Committee chaired by the governor, with membership of two deputy governors, two staff members and four members appointed by the President.This provision enables the CBK to discharge its mandate of crafting an all inclusive and consultative monetary
policy subject to the approval of the National Assembly. Further, with the constitutional requirement of gender equity, the Bill provides that at least two of the four members appointed by the President be of either gender. The MPC is required to submit to the national assembly a monetary policy statement at least twice every year. This provision creates yet another critical oversight check to the operation of the MPC.

However, to have the MPC, which is a.management committee, to submit a monetary policy statement to the National Assembly is unnecessary. In my considered view, the MPC should report to the Board of Directors, then the board reports to the Cabinet Secretary of the National Treasury who then presents a combined fiscal and monetary policy report and the budget policy statement to parliament once a year. In any case, nothing stops Parliament from summoning any committee or expert in any state organ, including the CBK, to give detailed evidence or positions about the monetary policy.

Overall, the draft will create a more efficient monetary market as the proposed system will eliminate inefficiencies due to adequate checks and balances. Because the main challenge has been market imperfections created by inefficient financial systems, the unclear procedures of appointing the governor, and, generally, the handling of the monetary policy, the financial reforms contained in this draft Bill has significantly reduced the opacity that is experienced in the financial and monetary system of the CBK.

The overall impact of this draft CBK Bill 2014 is likely to make CBK more accountable and efficient in the provision of critical financial services and monetary policy as envisaged in the
constitution.

As debate rages on this important legislation, let us not get unduly distracted by sideshows but concentrate on the bigger picture of reforming, arguably , the most important financial institution of this nation.Let’s not forget that one of the core objectives of CBK, as envisioned in the Bill, is to support the economic policy of the government, including its objectives for growth and employment. In the final analysis, passage of this Bill will be delivering the government’s pledge to create jobs as we spur growth and eradicate institutional and bureaucratic inefficiencies.

The writer Julius Bitok is a Professor of Finance at Co-operative University/ JKUAT and offers Financial Consultancy Services to Statehouse/Office of the President.

This article was adapted from the Standard Newspaper courtesy of Prof Julius Bitok.

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