CENTRAL BANK OF KENYA
Banking and Finance in Small States: Issues and Policies 16-20
April 2012
KEY CBK OBJECTIVES
To formulate and implement monetary policy directed to
achieving and maintaining stability in the general level of
prices;
To foster the liquidity, solvency and proper functioning of a
stable market-based financial system;
BANK SUPERVISION DEPARTMENT
The Department is tasked with the second objective of CBK.
The mission is to promote and maintain the safety, soundness
and integrity of the banking system through the
implementation of policies and standards that are in line with
international best practice for bank supervision and
regulation.
Legal and Supervisory framework
CBK ACT - One of the Central Bank’s core mandate is Financial
Stability- to foster the liquidity, solvency and proper functioning of a
stable market based financial system. Section 57 of the Act gives CBK
power to make regulations.
BANKING ACT – An Act of Parliament that regulates the business of
Banking in Kenya. Part VII of the Act deals with Inspection and Control
of Institutions. (Section 32 to 35)
CBK PRUDENTIAL GUIDELINES - CBK has to date issued 15
Prudential Guidelines, touching on the major critical risks in the
banking sector.
RISK MANAGEMENT GUIDELINES – Issued in 2005 to guide
institutions on minimum requirements for risk management
frameworks.
COMPOSITION OF THE KENYAN BANKING SECTOR
Institution
Numbers
Commercial Banks*
43
Foreign Exchange (Forex) Bureaus
122
Mortgage Finance Companies
1
Deposit-Taking Microfinance Institutions (DTMs)*
6
Credit Reference Bureaus (CRBs)
2
Representative Offices of foreign banks
3
Non-Bank Financial Institutions
None
Building Societies
None
*As at 31.12.2011 – 1200 branches; 15.5m deposit accounts (Kshs 1.6 trillion) &
3.0m loan accounts (Kshs 1.4 trillion) – banks & DTMs combined.
2,300 ATM Machines ( 31.12.2011) & 9,820 agents (31.12.2011) for 9 banks.
STRUCTURE OF THE BANKING
INDUSTRY
COMMERCIAL BANKS
Privately owned
- Locally owned
- 27
- Foreign owned
-9
Government Owned - 3
- and 4 branches of foreign incorporated banks.
Supervisory Approach
A “cradle to death’’ regulatory and Supervisory lifecycle is
followed to ensure the stability of institutions and protection
of depositors’ funds.
At the ‘’cradle (birth)’’, due diligence of license applications
is conducted. The due diligence focuses on the viability of
proposed institutions and the character of the proposed
shareholders, directors and senior officers.
The overarching objective of CBK’s gate keeping role is to
mitigate the risk of potentially unsound institutions entering
the financial system.
Supervisory Approach
During the life of an institution, CBK monitors the ongoing
operations of institutions through a combination of onsite
and offsite surveillance.
Onsite inspection focuses on validation of the risk
management frameworks of the institutions while Offsite
surveillance relies on submission of returns by institutions to
the Central Bank.
These returns whose frequency ranges from daily, fortnightly,
monthly to quarterly are analyzed and institutions requiring
closer attention are identified.
Supervisory Approach
CBK adopted RBS in 2006 after ensuring that the banking
industry has in place adequate Risk Management systems and the
staff were well trained.
While CBK issues guidelines as minimum standards, the
responsibility of managing the institutions is left to the board of
directors and the management.
The role of the regulator is to satisfy itself that individual banks
and institutions are following management practices which limit
risks to prudent levels.
Supervisory Approach
Where institutions run into difficulties arising from
insolvency and/or loss of market/depositor confidence, the
Central Bank has to contain the potential systemic risk to the
rest of the sector. This is usually done by the appointment of a
Statutory Manager by the Central Bank.
The Manager seeks to restructure the institution and put it
back on a recovery path. Where the initiatives of the
Statutory Manager do not bear fruit, the Central Bank has to
ensure the orderly exit of the institution by placing it under
liquidation by the Deposit Protection Fund Board (DPFB).
CBK Challenges & Initiatives
Kenya’s commercial banks operate within a traditional
banking model where interest on loans with short maturity is
their principle source of earnings, generally about three
quarters of the gross income.
Commercial loans and consumer advances are the principle
assets largely funded from retail deposits (85 percent). This
model negatively affects the growth of medium and longterm lending which is required for projects with long
gestation periods, especially those in the real sector.
CBK Challenges & Initiatives
CAPITAL POSITION.
The Kenyan banks are generally well capitalised (Core capital to
total risk weighted assets at 17.9% and total capital to total risk
weighted assets at 19.7% are above the minimum requirements of
8% and 12% respectively).
The minimum core capital of commercial banks and mortgage
finance companies was to increase progressively to Kshs 1 billion
by 2012.
The progressive increase is shown below: 31.12.2010 – Kshs 500 million (USD 6.5m).
31.12.2011 – Kshs 700 million (USD 8.75m).
31.12.2012 - Kshs. 1 billion (USD 12.5m).
CBK Challenges & Initiatives
Non-Performing Loans.
The ratio of non-performing loans(net) to gross loans stands
at 7.1 percent . A significant drop from 35% in 2005. The
drop was mainly due to loan write offs, introduction of ‘in
duplum’ rule, improvement in credit risk management and
improved economic situation.
Liquidity levels remained in excess of 40 percent, well above
the CBK statutory requirement of 20 percent. Despite the
high ratio, the composition of liquid assets includes some
assets (e.g. bonds) which sometimes are not easily
convertible to cash.
CBK Challenges & Initiatives
The Central Bank of Kenya (CBK) is pursuing financial
reforms geared towards enhancing financial access,
efficiency and stability of the banking sector.
The banking system is still fragmented, with many small
banks serving specific niches, but not contributing to
competition in the sector. The outreach of the financial
system is still limited.
CBK Challenges & Initiatives
AGENT BANKING
CBK issued guidelines on Agent Banking in May, 2010. The
agent banking model was mainly designed to assist banks in
providing banking services in a cost effective manner and at
the same time enhancing financial services outreach and
promoting financial inclusion of the unbanked Kenyan
population. Some of the functions offered by agents include
cash deposits, cash withdrawals, payment of bills and account
balance enquiry.
CBK Challenges & Initiatives
CREDIT REFERENCE BUREAU
CBK in collaboration with the Kenya Bankers Association
rolled-out the credit information sharing initiative in 2010.
This was in accordance with the Banking (Credit Reference
Bureau) Regulations, 2008 which came into effect in
February 2009. Banks can now share credit information on
their customers, which is critical in facilitating better
assessment of the risks associated with prospective
borrowers.
CBK Challenges & Initiatives
The credit information framework will also allow banks to
extend credit to customers on the basis of information capital
which is a departure from the traditional collateral
technology of using physical collateral. It is therefore the
Central Bank’s expectation that savings arising from the
sharing of credit information shall translate to lower cost of
credit. Positive Sharing of info also in the pipeline. Two
Bureaus have so far been licensed.
CBK Challenges & Initiatives
The Proceeds of Crime and Anti-Money Laundering
Act, 2009:–
Enacted into law in December 2009 and operationalised on
28th June 2010.
Mutual Evaluation of Kenya’s AML status by ESAAMLG
undertaken in May 2010.
CBK currently reviewing the AML Guideline to harmonise
with provisions in the Proceeds of Crime and AML Act.
CBK Challenges & Initiatives
• Signing of MOUs with East African Central Banks
(Uganda, Tanzania, Rwanda and Burundi) and with other
Domestic Financial Sector Regulators (CMA, RBA and IRA
– facilitates collaboration in supervision and information
sharing in the wake of increasing regional expansion and
convergence in the players across the financial subsectors.
• CBK is pursuing to enter into MOUs with central banks of
such countries as South Africa, Nigeria, Mauritius, United
Arab Emirates etc where there are related institutions to
those operating in Kenya.
CBK Challenges & Initiatives
Interest Rates spread has remained relatively steady hovering
around 10-12 percent for the last few years.
There is considerable pressure from politicians to reduce the
spread as banks are seen to be exploitative. A bill has been
proposed in parliament to introduce controls by capping both
interest on deposits as well as interests on loans and advances.
CBK Challenges & Initiatives
The Central Bank in collaboration with the Government
continue to create an enabling legal and regulatory
framework for innovations that will facilitate delivery of
financial services to underserved and unbanked Kenyans.
The challenge is to embrace innovative delivery channels
that will extend financial services to these segments of
the Kenyan populace at an affordable cost. To this end,
mobile phone financial services offerings have been
instrumental and have a transformational impact on
financial inclusion in Kenya.
CBK Challenges & Initiatives
The structural transformation experienced thus far is
just but the beginning. CBK and other players have
earmarked several other reforms which are expected to
take the development of the financial sector to new
frontiers.
CBK has embraced financial education as a critical
component of its financial inclusion strategy. When
consumers are financially literate, they are able to make
informed financial decisions. In this regard, CBK along
with other stake holders is developing a National
Strategy for Financial Education in Kenya.