KCB’S ETHICAL LANDSCAPE

A TERM PAPER ON ITS CHALLENGES, RESPONSES AND FUTURE DIRECTIONS.

SHEILA MAINA
151288
ACTUARIAL SCIENCE

25th October 2024

OVERVIEW OF KCB GROUP

KCB Group PLC, based in Nairobi, Kenya, is one of East Africa’s largest and most influential
financial institutions. Established in 1896, KCB has been offering a wide array of financial
services across multiple countries with operations covering retail banking, corporate banking,
and investment management. KCB’s mission, “To passionately serve our customers by offering
innovative solutions to their banking needs”, reflects a great dedication to effective customer
service. Furthermore, KCB’s vision, “To be the preferred banking partner for all customers”,
signals the firm’s great commitment to becoming a leader in customer satisfaction and trust. The
institution operated within the financial services industry, a sector integral to Kenya’s economic
growth and stability.

KCB’s primary operations cover various banking segments, including credit, insurance, and
digital solutions with a key focus on expanding mobile banking. According to the most recent
reports and financial statements, KCB holds assets worth KES 1.06 trillion, making it a
significant and powerful player in the region’s financial landscape. The firm’s broad
geographical presence includes over 300 branches in Kenya and other East African countries,
allowing it to reach millions of customers. Moreover, the bank has over 7 million users, largely
due to the presence of KCB M-Pesa mobile platform, that plays a pivotal role in the bank’s
revenue, reflecting the firm’s adaptability and responsiveness to Kenya’s digital transformation.
ETHICAL ISSUES FACED BY KCB OVER THE RECENT YEARS

1. Lending Practices and Consumer Protection

One of the major ethical issues faced by KCB in recent years involves some of its digital
lending practices, particularly through the KCB M-Pesa platform. Some of the Central
Bank of Kenya’s reports emerged, claiming that the bank charged high interest rates on
its borrowers, reaching up to 12% per month, which was more than 4% above the central
base rate of 7% in 2022. Moreover, the bank was accused of charging undisclosed fees
that most customers were unaware of until after being granted loans by KCB.

The issue raised major concerns about predatory lending, as many customers who relied
on KCB M-Pesa for quick and easy access to cash, often found themselves in cycles of
debt, with monthly interest rates compounding to unsustainable levels. This adversely
affected customers from the base of the economic pyramid at the time, who were among
the primary users of these mobile loans offered by KCB.
The consequences of these practices were significant on KCB. The institution faced
reputational damage as the public perceived these high fees and aggressive collection
studies as highly exploitative, potentially reducing KCB’s customer loyalty and trust in
the bank. Additionally, the Central Bank of Kenya had increased its scrutiny on digital
lending platforms in 2022, compelling KCB and similar lenders to reevaluate their loan
terms, potentially limiting their growth opportunities in the lending sector. In response to
 this, KCB has reported a similar increase in non-performance, with non-performing
loans, (NPLs), standing at KES 97 billion according to their 2023 fiscal year report. This
reflected customer difficulty and defaults due to the high interest rates that were charged
on them during the previous year. The trend has had financial difficulties on the bank, as
regulatory compliance and potential legal actions from major consumer rights groups
could lead to higher operational costs, as well as erode overall profitability.
2. Corporate Governance and Transparency.
KCB has also faced major scrutiny regarding its corporate governance practices,
particularly in relation to its transparency and dealings with some of its high-profile
government clients. In 2021, major allegations surfaced, suggesting that KCB may have
engaged in non-transparent practices involving several large financial transactions. This
raised concerns about potential conflicts of interest and misalignment with the financial
services’ ethical standards, with critics suggesting that KCB executives may have
prioritized these transactions over sound risk assessment protocols.

Some of the pressing transactions that raised concerns were the bank’s substantial lending
exposure to government-related entities. This was a major focal point, with public sector
loans accounting for approximately 17% of KCB’s loan portfolio, which was
approximately KES 94 billion, according to the bank’s annual report in 2022. This
concentration raised a lot of questions about potential conflicts of interest and concerns
over preferential treatment. Some critics believe that KCB did not fully disclose the risks
that were associated with these loans, as they are often more volatile, due to the heavy
political influences tied to them.

This lack of confidence ultimately affected KCB’s investor confidence, with the firm’s
stock price falling by a staggering 3% within the financial quarter that followed these
allegations.
KCB’s RESPONSE TO THE ABOVE ETHICAL ISSUES.
a) Response to concerns regarding its lending practices.
To address the concerns regarding its lending practices, KCB implemented several
key initiatives that were aimed at enhancing transparency and customer education. In
2022, the bank adopted a transparent pricing model for its loans. This new model
clearly outlines all the associated fees and interest rates to customers seeking out
loans. The bank also decided to maintain its interest rates at no more than 4% above
the central base rates, aligning its pricing model to the Central Bank of Kenya’s
financial regulations.

Additionally, KCB launched several education programs, focused on improving

financial literacy, particularly among the vulnerable segments such as low-income
earners and micro-entrepreneurs. By the end of 2022, these new programs had
 impacted on over 150,000 customers, showcasing KCB’s commitment to empowering
its clients and promoting informed financial decision making. The bank was also able
to establish a consumer feedback system that allowed clients to report their
grievances on the bank’s digital lending practices. In its inaugural year, the system
received roughly 10,000 submissions, enabling KCB to have sufficient data that
would help them adopt a more ethical approach to its customer relations.
b) Response to corporate governance and transparency challenges.
In response to the major governance and transparency issues the bank faced in 2021,
KCB decided to come up with an independent ethics committee that was tasked with
overseeing the firm’s compliance with financial regulations and enforcing ethical
standards, particularly with the bank’s dealings with high profile clientele. This
committee comprises of major experts in the field of corporate governance and ethics.
The team meets quarterly and evaluates KCB’s practices over the last quarter. It also
reports any compliance issues to the board and ensures the necessary steps are taken
to rectify the issues.

Moreover, KCB revised its corporate governance framework to align with the
updated guidelines from its regulatory body, The Central Bank of Kenya, which was
issued in 2022. This reflected the accountability and ethical conduct in KCB’s revised
banking operations. The realignment involved a comprehensive review of the bank’s
policies and implementation of major codes of conduct, such as requiring regular
ethics training for all its employees. These initiatives reflect KCB’s dedication to
enhancing ethical standards throughout the organization, promoting trust and integrity
among its stakeholders, and minimizing the risk of governance failures in the future.
ANALYSIS OF KCB’S APPROACH TO ETHICAL ISSUES.
KCB has made notable strides in addressing its ethical challenges, particularly
through enhanced transparency and consumer education. Through the adoption of a
transparent pricing model for loans and launching financial literacy initiatives, KCB
was able to empower its clients to make informed financial choices. These initiatives
not only sought to build trust, but also align KCB’s practices with the regulatory
guidelines from the Central Bank of Kenya. This demonstrates KCB’s commitment to
ethical conduct and compliance within the financial services industry.

However, some critics have argued that significant concerns still remain regarding the
effectiveness of KCB’s initiatives. A major concern is in KCB’s debt collection
practices, which some have argued that they are too aggressive and could harm
borrowers financially. Furthermore. Despite the establishment of an independent
ethics committee, its true effectiveness hinges on the bank’s commitment to
implement its recommendations. To further strengthen its overall ethical framework,
KCB must foster a culture of accountability and engage its stakeholders continuously.
 By adopting a more proactive approach to its ethical challenges, KCB can enhance its
reputation and contribute positively to Kenya’s constantly evolving financial
landscape.
PROPOSED ETHICAL DECISION-MAKING FRAMEWORK AND ITS
JUSTIFICATION.
To effectively manage ethical dilemmas, KCB should implement an ethical decision-
making framework that is heavily grounded in both consequential and deontological
ethics, focusing on outcomes of its actions and moral principles. Such a framework
would include the following key steps:
a) Identification of Ethical Issues – KCB should begin by clearly identifying its
ethical dilemmas as they rise. Early identification will allow the firm enough time
to address the potential issues before they escalate out of proportion, hence
minimizing negative consequences for stakeholders and maintaining trust.
b) Conducting Stakeholder Analysis – The bank should seek to evaluate the
potential impact of its decisions on all stakeholders, including its customers,
employees and regulatory bodies. Understanding the interests of its various
stakeholders will foster transparency and accountability, enabling KCB to make
more informed decisions that consider their broader impact.
c) Evaluating Possible Alternatives – KCB should assess various courses of action,
weighing them against ethical principles and their projected outcomes. This step
will promote thorough analysis and critical thinking, ensuring that the firm’s
decisions align with its core values and strategic objectives.
d) Making an Ethical Decision- The bank should opt for decisions that align with
their major core values, while ensuring compliance with the established ethical
principles from its regulators. This will reinforce KCB’s reputation as a
responsible institution and foster customer loyalty and major public trust.
e) Implementation and Monitoring – KCB should put its decisions into action and
establish robust accountability mechanisms. This will track the bank’s compliance
and effectiveness, while ensuring that ethical standards are upheld.
f) Reflection and Adaption – After implementation of the ethical decisions, the
bank should evaluate their outcomes and refine their frameworks based on the
lessons learnt so far. This continuous reflection and adaptation will promote a
learning environment, allowing KCB to evolve its practices and remain relevant
and responsive to the ever-changing stakeholder expectations and ethical
standards.

REFLECTIVE SUMMARY AND RECOMMENDATIONS

This assignment emphasized the crucial role that business ethics plays in ensuring organizational
success and fostering positive societal impact. The assignment has outlined how ethical practices
are crucial for building reputation, customer loyalty and sustainability. KCB’s recent ethical
challenges, such as its previous unethical lending practices and lack of transparency in its
corporate governance, highlights the need for embedding ethical considerations through its
operations.

One key insight is that ethical lapses can lead to significant consequences, affecting financial
performance and stakeholder relationships. KCB’s issues with high-interest rates and lack of
transparency in lending illustrate the potential harm to vulnerable customers and the erosion of
public trust. Similarly, governance concerns can lead to allegations of corruption, jeopardizing
the bank’s integrity.

To enhance its ethical practices, KCB should consider the following actionable
recommendations:

a) Strengthening Ethical Training: Implementing comprehensive ethics training for

employees will emphasize ethical conduct and real-world scenarios relevant to the
banking industry.
b) Enhancing Transparency in Lending: Adopting clearer communication strategies, with
regards to loan terms will empower customers and reduce debt distress.
c) Establishing Robust Feedback Mechanisms: The creation of accessible systems for
consumer feedback will allow customers to voice their concerns about ethical issues in
the bank’s lending practices.
d) Engaging Stakeholders: Regularly engaging with the bank’s stakeholders will help align
their practices with the current societal expectations as well as enhance their reputation.
e) Implementation of Regular Ethical Audits: Conducting periodic ethical audits to
evaluate compliance with standards and identify areas for improvement will ensure the
firm sticks to its ethical commitments and build overall trust with its stakeholders.

In conclusion, prioritizing ethical practices will enable KCB Group to strengthen its reputation,
build stakeholder relationships, as well as positively impact the society. By ensuring the
implementation of the above recommendations, KCB can become a regional leader in
responsible banking practices.

REFERENCES

(CBK | Central Bank of Kenya, n.d.)

(KCB Group, n.d.-a)

(KCB Group, n.d.-b)

(PricewaterhouseCoopers, 2024)
(The Standard - Kenya & World News | Latest and Breaking News, n.d.)

(Kenya, 2024)

(Nyambura, J. (2021). Corporate Governance in the Banking Sector: A Case Study of KCB
Bank. Journal of Banking and Finance, 45(2), 143-159. Doi:10.1016/j.Jbf.2021.04.002 - Google
Search, n.d.)